You, the managerial accountant, are asked by the CFO (Mr. Smith) of Wilson–West Manufacturing (a new company) to set up a product costing system. The following are the types of expenses that will be included:
Insurance on the equipment
Rent on the plant
Rent for the office
In a memo format, explain to Mr. Smith and the president what will be included in product costing.
Explain what is involved in a product costing system.
Explain why Wilson–West Manufacturing needs to have a product costing system.
Allocate the above expenses as fixed, mixed, or variable expenses.
Prepare calculations for the following, and explain your computations:
Variable cost: The unit rate is $0.25, and the actual hours used for manufacturing are 15,000.
Mixed cost: The unit rate is $0.25, actual hours are 10,000, and the fixed cost is $5,000 per month.
Total cost: Use your calculations from above.
Explain this to Mr. Smith who will prepare these calculations on a monthly basis.