Question

ALASKA MANUFACTURING produces widgets, which they sell for $5 each. They are preparing their budget for production costs for February 2017. Actual production costs in the previous month, January 2017, were as follows, when production was 20,000 widgets: Raw materials (variable) $ 50,000 Labor costs (variable) 20,000 Factory rent (fixed) 12,000 Equipment depreciation (fixed) 16,000 Other production costs (fixed) 2,000 Total $ 100,000 REQUIRED: 1) What was the prime cost for January, both total AND per-unit? 2) What was the conversion cost of January, both total AND per-unit? 3) ALASKA anticipates that production will rise to 25,000 widgets in February. Using the above numbers as your guide, what would be the expected production cost for February? 4) Does your February budget suggest that additional workers will be needed? Assuming the wage rate is $20 per hour, how many additional labor hours are indicated for February? 5) What was the actual production cost per unit for the January? What is the expected production cost for February? Explain WHY the total production cost per unit changed in the direction that it did. 6) What is the “formula” that you could use to determine the total production cost for ALASKA for any particular month? 7) What formula could you use to determine the profit for any particular month? What is the anticipated profit for February? (Assume that there are no other expenses other than those mentioned above.) 8) What is the “formula” that you could use to determine the total production cost for ALASKA for the year? 9) Prepare a graph which shows ALASKA’s monthly production costs. Show $(cost) on the Y axis and PRODUCTION on the x axis. The graph should separately show: variable costs, fixed cost and total cost. Include points for BOTH January (actual) and February (budgeted). You may do this graph BY HAND and it need NOT be “to scale”.

Answer 1

	Alaska Manufacturing
1)	Prime cost of January
	Direct Material	$    50,000.00
	Direct Labor	$    20,000.00
	Total Prime cost=($50000+$20000)	$    70,000.00
	Actual Production in January	20000	Widgets
	Prime cost per unit=($70000/20000)	$               3.50	Per Unit
	Note: Prime cost of production includes Direct Material and labor cost excluding fixed cost
2)	Conversion Cost
	Direct Labor cost(Variable)	$    20,000.00
	Factory Rent(Fixed)	$    12,000.00
	Equipment Depreciation(Fixed)	$    16,000.00
	Other Production Cost(Fixed)	$      2,000.00
	Total Conversion cost	$    50,000.00
	Actual Production in January	20000	Widgets
	Conversion cost per unit=($50000/$20000)	$               2.50	Per Unit
	Note: Conversion cost includes both direct and indirect production cost that involves to convert direct material into finished goods.Examples are wages,Depreciation of plant & equipment,Rent etc.
	Formula: Direct Labor+Manufacturing Overheads
	or
	Total Manufacturing cost- Direct Material cost
3)	Direct Material cost=($50000/20000)*25000	$    62,500.00
	Direct Labor cost=($20000/20000)*25000	$    25,000.00
	Factory Rent(Fixed)	$    12,000.00
	Equipment Depreciation(Fixed)	$    16,000.00
	Other Production Cost(Fixed)	$      2,000.00
	Total Production Cost	$ 117,500.00
4)	If the wage Rate is $20 per Hours ,Hours used in January=($20000/$20)=	1000	Hours
	Hours required for 25000 units=(1000/20000)*25000=	1250	Hours
	Additional Hours Required in February=(1250-1000)	250	Hours
	Yes ,250 additional Hours required in February.
5)	Actual Production Cost for January=($100000/20000)	$               5.00	Per Unit
	Actual Production Cost for February=($117500/25000)	$               4.70	Per Unit
	Prodcution cost per unit will be less in case of February because fixed cost per unit will changes due to increase production but variable cost per unit will remains the same at all levels of production
6)	Formula Use for total Production=Direct Material+Direct Labor+Manufacturing Overheads
	Manufacturing Overheads includes cost incurred in the factory except Direct Material and Direct Labor
7)	Profit=Revenue-Cost
	Sales=(25000*$5)	$ 125,000.00
	Less: Cost	$ 117,500.00
	Profit=($125000-$117500)	$      7,500.00