Author Question: Account analysis method. Gower, Inc., a manufacturer of plastic products, reports the following ... (Read 61 times)

c0205847 · **on:** Jul 6, 2018

Account analysis method.

Gower, Inc., a manufacturer of plastic products, reports the following manufacturing costs and account analysis classification for the year ended December 31, 2014.

Gower, Inc., produced 75,000 units of product in 2014. Gower's management is estimating costs for 2015 on the basis of 2014 numbers. The following additional information is available for 2015.

a. Direct materials prices in 2015 are expected to increase by 5 compared with 2014.
b. Under the terms of the labor contract, direct manufacturing labor wage rates are expected to increase by 10 in 2015 compared with 2014.
c. Power rates and wage rates for supervision, materials handling, and maintenance are not expected to change from 2014 to 2015.
d. Depreciation costs are expected to increase by 5, and rent, property taxes, and administration costs are expected to increase by 7.
e. Gower expects to manufacture and sell 80,000 units in 2015.

Required:
1. Prepare a schedule of variable, fixed, and total manufacturing costs for each account category in 2015. Estimate total manufacturing costs for 2015.
2. Calculate Gower's total manufacturing cost per unit in 2014, and estimate total manufacturing cost per unit in 2015.
3. How can you obtain better estimates of fixed and variable costs? Why would these better estimates be useful to Gower?

Question 2

The Item column in the ledger is mostly used at the end of a financial period to make brief notations about end-of-period entries.
a. True
b. False
Indicate whether the statement is true or false

mrphibs · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. Manufacturing cost classification for 2014:

Account

Total
Costs
(1) of
Total Costs That is
Variable
(2)

Variable
Costs
(3) = (1) (2)

Fixed
Costs
(4) = (1) (3)

Variable
Cost per Unit
(5) = (3) 75,000

Direct materials
Direct manufacturing labor
Power
Supervision labor
Materials-handling labor
Maintenance labor
Depreciation
Rent, property taxes, admin
300,000
225,000
37,500
56,250
60,000
75,000
95,000
100,000
100
100
100
20
50
40
0
0
300,000
225,000
37,500
11,250
30,000
30,000
0
0
0
0
0
45,000
30,000
45,000
95,000
100,000
4.00
3.00
0.50
0.15
0.40
0.40
0
0
Total 948,750 633,750 315,000 8.45

Total manufacturing cost for 2014 = 948,750

Variable costs in 2015:

Account Unit Variable Cost per Unit for 2014
(6)

Percentage Increase
(7)
Increase in Variable Cost
per Unit
(

= (6) (7)

Variable Cost per Unit
for 2015
(9) = (6) + (

Total Variable Costs for 2015
(10) = (9) 80,000

Direct materials
Direct manufacturing labor
Power
Supervision labor
Materials-handling labor
Maintenance labor
Depreciation
Rent, property taxes, admin.
4.00
3.00
0.50
0.15
0.40
0.40
0
0
5
10
0
0
0
0
0
0
0.20
0.30
0
0
0
0
0
0
4.20
3.30
0.50
0.15
0.40
0.40
0
0
336,000
264,000
40,000
12,000
32,000
32,000
0
0
Total 8.45 0.50 8.95 716,000

Fixed and total costs in 2015:

Account
Fixed Costs
for 2015
(11)

Percentage
Increase
(12) Dollar Increase in Fixed Costs
(13) =
(11) (12)
Fixed Costs
for 2015
(14) =
(11) + (13)
Variable Costs for 2015
(15)
Total
Costs
(16) =
(14) + (15)

Direct materials
Direct manufacturing labor
Power
Supervision labor
Materials-handling labor
Maintenance labor
Depreciation
Rent, property taxes, admin.
0
0
0
45,000
30,000
45,000
95,000
100,000
0
0
0
0
0
0
5
7
0
0
0
0
0
0
4,750
7,000
0
0
0
45,000
30,000
45,000
99,750
107,000
336,000
264,000
40,000
12,000
32,000
32,000
0
0
336,000
264,000
40,000
57,000
62,000
77,000
99,750
107,000
Total 315,000 11,750 326,750 716,000 1,042,750

Total manufacturing costs for 2015 = 1,042,750

2. Total cost per unit, 2014 = = 12.65
Total cost per unit, 2015 = = 13.03

3. Cost classification into variable and fixed costs is based on qualitative rather than quantitative analysis. How good the classifications are depends on the knowledge of individual managers who classify the costs. Gower may want to undertake quantitative analysis of costs, using regression analysis on time-series or cross-sectional data to better estimate the fixed and variable components of costs. Better knowledge of fixed and variable costs will help Gower to better price his products, to know when he is getting a positive contribution margin, and to better manage costs.

Answer to Question 2

True