Managerial Accounting

Case Study 1

Cost Concepts, Behaviors & Measurements

Submitted by:

AUBREY ACE R. BASARTE

Submitted to:

Prof. Rosfe Corlae Badoy

BA 2005 Managerial Accounting

CASE 1: COST CONCEPTS, BEHAVIORS & MEASUREMENTS

Your Fabrication, Inc. produced and sold 1,200 units of the company’s sole product in August. You
have collected the following information from the accounting records:

(In US Dollars)

Sales Price (per unit) 896

Manufacturing Costs:
Fixed Overhead (for the month) 100,800
Direct Labor (per unit) 70
Direct Materials (per unit) 224
Variable Overhead (per unit) 140
Marketing and Administrative Costs:
Fixed Cost (for the month) 134,400
Variable Costs (per unit) 28

Required:

1. Compute the following:

a. Variable manufacturing cost per unit
Direct Materials $ 224.00
Direct Labor $ 70.00
Variable Manufacturing overhead $ 140.00
Variable Manufacturing cost per unit $ 434.00

b. Total manufacturing cost per unit

Direct Materials $ 224.00
Direct Labor $ 70.00
Manufacturing overhead $ 224.00
Total Manufacturing cost per unit $ 518.00

c. Variable cost per unit

Direct Materials $ 224.00
Direct Labor $ 70.00
Variable Manufacturing overhead $ 140.00
Variable Marketing and Administrative Cost $ 28.00
Variable cost per unit $ 462.00
d. Total cost per unit
Direct Materials $ 224.00
Direct Labor $ 70.00
Factory Overhead
Fixed Overhead $ 84.00
Variable Overhead $ 140.00
Total Manufacturing Cost $ 518.00
Marketing and Administrative Costs
Fixed Cost $ 112.00
Variable Cost $ 28.00
Total cost per unit $ 658.00

e. Prime cost per unit

Direct Materials $ 224.00
Direct Labor $ 70.00
Prime Cost per unit $ 294.00

f. Conversion cost per unit

Direct Labor $ 70.00

Factory Overhead $ 224.00
Conversion Cost per unit $ 294.00
g. Profit margin per unit

Sales $ 896.00
Variable Costs $ 462.00
Contribution Margin $ 434.00
Fixed Costs $ 196.00
Profit margin per unit $ 238.00

h. Contribution margin per unit

Sales $ 896.00
Variable Costs $ 462.00
Contribution margin per unit $ 434.00

i. Gross margin per unit

Sales $ 896.00
Cost of goods Sold $ 518.00
Gross Margin per unit $ 378.00
 2. If the number of units decreases from 1,200 to 800, which is still within the relevant range,
what will happen to the fixed manufacturing cost per unit? Explain.

If 1,200 units are produced:

Fixed Manufacturing Cost $ 100,800.00

Number of units produced 1,200
Fixed Manufacturing Cost per unit $ 84.00
If the units produced decreases to 800 units:

Fixed Manufacturing Cost $ 100,800.00

Number of units produced 800
Fixed Manufacturing Cost per unit $ 126.00

If the number of units produced during the month decreases from 1200 to 800 units, the fixed
manufacturing cost per unit increases from 84 to 126 per unit. This is so because the total
amount of fixed manufacturing overhead cost (100,800) being allocated to the number of unit
remains constant regardless of the change in volume, hence, fixed cost per unit changes in an
indirect or inverse pattern, depending on the direction of the change in activity level. In this
case, the fixed manufacturing cost per unit increases as the number of units produced
decreases.

3. If the number of units increases from 1,200 to 1,500, what will happen to the fixed
manufacturing cost per unit? Explain.

If 1,200 units are produced:

Fixed Manufacturing Cost $ 100,800.00
Number of units produced 1,200
Fixed Manufacturing Cost per unit $ 84.00

If the units produced increases to 1,500 units:

Fixed Manufacturing Cost $ 100,800.00

Number of units produced 1,500
Fixed Manufacturing Cost per unit $ 67.20

If the number of units produced during the month increases from 1200 to 1500 units, the fixed
manufacturing cost per unit decreases from 84 to 67.20 per unit. This is so because the total amount
of fixed manufacturing overhead cost (100,800) being allocated to the number of unit remains
constant regardless of the change in volume, hence, fixed cost per unit changes in an indirect or
inverse pattern, depending on the direction of the change in activity level. In this case, the fixed
manufacturing cost per unit decreases as the number of units produced increases.