CHAPTER 4

E4-1

Variable Costs

a. Indirect labor*
b. Indirect materials
d. Overtime premium pay
f. Polishing compounds
g. Depreciation on machinery
h. Employer’s payroll taxes
j. Machine lubricants
k. Employees’ hospital insurance
l. Labor for machine repairs
m. Vacation pay
n. Janitor’s wages
p. Small tools
r. Factory electricity
s. Product inspector’s wages

Fixed Costs

c. Insurance on building
e. Depreciation on building
i. Property taxes
o. Rent
q. Plant manager’s salary

E4-2
Hours Cost
High volume ...................................................................................................................... 900 $ 11,000
Low volume ...................................................................................................................... 400 6,000
Change ...................................................................................................................... 500 $ 5,000

Variable cost per indirect labor hour: $5,000/500 = $10.00

400 Hours 900 Hours

Total cost................................................................................................................................... $ 6,000 $ 11,000
Variable cost @ $10.00 per hour ............................................................................................. 4,000 9,000
Fixed cost .................................................................................................................................. $ 2,000 $ 2,000

E4-3

1.
Indirect Labor Cost
E4-3 Concluded.

2.

Reading from the Graph:

Total fixed costs (the point where the trend line intersects the Y-axis)….$2,000

Solving for variable costs using any data point:

At 500 hours:
Total costs.................................................................................... $ 7,000
Fixed costs ................................................................................... 2,000
Variable costs .............................................................................. $ 5,000

$5,000
Variable cost per unit:  $10 hour
500 hours

E4-4
1. and 2.
Indirect Indirect
Labor Labor
Month Hours Costs
January 400 $6,000
February 500 $7,000
March 600 $8,000
April 700 $9,000
May 800 $10,000
June 900 $11,000

Intercept $2,000.00
Slope $10.00
RSQ 1
3. There is no difference in the solution obtained under the three methods. There were no outlier data points that would result
in inaccuracies in the high-low points and scattergraph solutions.

E4-5
Hours Cost
High volume ...................................................................................................................... 1,700 $ 22,000
Low volume ...................................................................................................................... 700 10,000
Change ...................................................................................................................... 1,000 $ 12,000

Variable cost per machine hour: $12,000/1,000 = $12.00

700 Hrs. 1,700 Hrs.

Total cost................................................................................................................................... $10,000 $ 22,000
Variable cost @ $12.00 per hour ............................................................................................. 8,400 20,400
Fixed cost .................................................................................................................................. $ 1,600 $ 1,600
E4-6
a. and b.
Budget

12,000 units 10,000 units 20,000 units

Direct materials @ $7.00 per unit $ 84,000 $ 70,000 $140,000

Direct labor @ 8.00 per unit 96,000 80,000 160,000

Fixed factory overhead * 24,000 24,000 24,000

Variable factory overhead @ $3.00 per unit

36,000 30,000 60,000

Total cost $240,000 $204,000 $384,000

Unit cost $20.00 $20.40 $19.20

* Fixed factory overhead at a budgeted level of production of 12,000 units is $24,000 (12,000  $2).

c. The variable elements of total cost will increase or decrease in proportion to the
increase or decrease in production. However, costs for the variable elements on a unit basis will remain the same. Total
fixed costs will remain constant, but unit costs for fixed elements will increase as production decreases and decrease as
production increases because the same total cost is being divided by fewer or more units. The difference in unit costs is
due to the change in fixed costs per unit.

E4-7
a. Floor space occupied by other
departments.

b. Production volume by department.

c. Cost of machinery and equipment by department or machine hours.

d. Number of workers in departments served.
e. Number of purchase orders requested.
f. Quantity and weight of items shipped.
g. Units of materials requisitioned.

Note: Students may arrive at different answers.

E4-8

1.
Building Factory
Maintenance Office Assembly Machining Total
Direct charges ..................................... $90,000 $ 171,000 $ 378,000 $ 328,000 $ 967,000
Building maintenance—
floor space: ................................... (90,000)
Assembly—
$90,000  40/90...................... 40,000
Machining—
$90,000  50/90...................... 50,000

Factory office—
direct labor hours:......................... (171,000)
Assembly—
$171,000  80,000/120,000 ... 114,000
Machining—
$171,000  40,000/120,000 ... 57,000
$532,000 $ 435,000 $ 967,000

2.
Building Factory
Maintenance Office Assembly Machining Total
Direct charges ............................... $90,000 $ 171,000 $ 378,000 $ 328,000 $ 967,000
Building maintenance— .. (90,000)
floor space:
Factory office—
$90,000  10% ....................... 9,000
Assembly—
$90,000  40% ....................... 36,000
Machining—
$90,000  50% ....................... 45,000
$ 180,000
Factory office—
direct labor hours:......................... (180,000)
Assembly—
$180,000  80,000/120,000 ... 120,000
Machining—
$180,000  40,000/120,000 ... 60,000
$ 534,000 $ 433,000 $ 967,000

E4-9

1.
 Human Machine
Resources Repair Grinding Polishing Total
Direct charges .... $100,000 $ 150,000 $ 450,000 $ 350,000 $1,050,000
Human resources—
number of employees: (100,000)
Grinding—
$100,000  30/45… 66,667
Polishing—
$100,000  15/45.................... 33,333

Machine repair—
machine hours: ............................. (150,000)
Grinding…
$150,000  75,000/100,000 ... 112,500
Polishing…
$150,000  25,000/100,000 ... 37,500
$629,167 $ 420,833 $1,050,000

2.
Human Machine
Resources Repair Grinding Polishing Total
Direct charges ......................................... $100,000 $ 150,000 $ 450,000 $350,000 $1,050,000
Human resources—
number of employees: .................. (100,000)
Machine repair—
$100,000  5/50...................... 10,000
Grinding—
$100,000  30/50.................... 60,000
Polishing—
$100,000  15/50.................... 30,000
Total…….. $ 160,000
Machine repair— .................................... (160,000)
machine hours:
Grinding—
$160,000  75,000/100,000 ... 120,000
Polishing—
$160,000  25,000/100,000 ... 40,000
$ 630,000 $ 420,000 $ 1,050,000
E4-10

a. Direct labor cost method—$3,200 direct labor cost x 100%................................................................ $3,200

Total cost of job = $5,000 + $3,200 + $3,200 = $11,400

b. Direct labor hour method—250 direct labor hours  $10..................................................................... $2,500

Total cost of job = $5,000 + $3,200 + $2,500 = $10,700

c. Machine hour method—295 machine hours  $12.50....................... ……………… $3,687.50

Total cost of job = $5,000 + $3,200 + $3,687.50 = $11,887.50

E4-11
a. Facility-level
b. Facility-level
c. Unit-level
d. Unit-level
e. Unit-level
f. Batch-level
g. Facility-level
h. Facility-level
i. Unit-level (Could also be considered batch-level if lots are inspected on a test basis)
j. Product-level

E4-12
Direct materials ............................................................................................................................................ $ 5,000
Direct labor ....................................................................................................................................................... 2,000
Factory overhead:
Assembly support (200  $5)................................................................................................................. 1,000
Machining support (100  $10) ............................................................................................................. 1,000
Machine setups (2  $250)..................................................................................................................... 500
Design changes (3  $500) .................................................................................................................... 1,500
Total cost of complete job ................................................................................................................................ $ 11,000

E4-13
Direct materials ............................................................................................................................................ $ 10,000
Direct labor ....................................................................................................................................................... 4,000
Factory overhead:
Direct labor support (300  $10) ........................................................................................................... 3,000
Machining support (150  $15) ............................................................................................................. 2,250
Material moves (3  $350)..................................................................................................................... 1,050
Engineering (5  $700) .......................................................................................................................... 3,500
Total cost of complete job ................................................................................................................................ $ 23,800

E4-14
Assembly support (direct labor cost):
Machining support (machine hours):
Machine setups (number of setups):
Design changes (design hours):
$50,000/$75,000 = $.67 per direct labor
$80,000/2,000 = $40 per machine hour
$25,000/200 = $125 per setup
$15,000/500 = $30 per design hour
E4-15
Direct materials cost ................................... $40,000
Direct labor cost
($40,000  1.5) ...............................................................$60,000  $10 per hour = 6,000direct labor hours
Factory overhead application rate ...............................................................................  $4.00
Factory overhead applied to jobs ................................................................................ $24,000
Less overapplied factory overhead ............................................................................. 2,000
Total actual factory overhead for the period .............................................................. $22,000

E4-16
Balance of work in process ($47,000 – $40,000) .................................................................... $ 7,000
Less materials cost .................................................................................................................... 3,400
Labor and factory overhead costs ............................................................................................ $ 3,600

Let X = direct labor cost, then:

X + 1.0 X = $3,600
2.0 X = $3,600
X = $1,800 labor
X = $1,800 overhead

E4-17
a. Work in Process.............................................................................................................. $ 25,000 16.67%
Finished Goods ............................................................................................................... 25,000 16.67
Cost of Goods Sold ........................................................................................................ 100,000 66.67
Total ................................................................................................................................ $ 150,000 100.00%

Work in Process ($20,000  16.67%)............................................................................ $ 3,333

Finished Goods ($20,000  16.67%) ............................................................................. 3,333
Cost of Goods Sold ($20,000  66.67%) ...................................................................... 13,334
$ 20,000

b. Under-and Overapplied Factory Overhead ................................................................... 20,000

Work in Process…………………………………………… .................................. 3,333
Finished Goods ......................................................................................................... 3,333
Cost of Goods Sold .................................................................................................. 13,334

E4-18
a. Work in Process.............................................................................................................. $ 60,000 24%
Finished Goods ............................................................................................................... 40,000 16
Cost of Goods Sold ........................................................................................................ 150,000 60
Total ................................................................................................................................ $ 250,000 100%

Work in Process ($25,000  24%)………………………… ........................................ $ 6,000

Finished Goods ($25,000  16%) .................................................................................. 4,000
Cost of Goods Sold ($25,000  60%)............................................................................ 15,000
$ 25,000
b.
Work in Process…………………………………………… ........................................ 6,000
Finished Goods ............................................................................................................... 4,000
Cost of Goods Sold ........................................................................................................ 15,000
Under-and Overapplied Factory Overhead ................................................................... 25,000