You, the managerial accountant, are asked by the CFO (Mr

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.