Explain what is involved in a product costing system.

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:

  • Direct labor
  • Direct materials
  • Utilities
  • Depreciation
  • Maintenance
  • Insurance on the equipment
  • Rent on the plant
  • Administrative salaries
  • 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.