Gower, Inc.

, a manufacturer of plastic products, reports the following manufacturing costs and

account analysis classification for the year ended December 31, 2017.

Account Classification Amount

Direct materials All variable $300,000
Direct manufacturing labor All variable 225,000
Power All variable 37,500
Supervision labor 20% variable 56,250
Materials-handling labor 50% variable 60,000
Maintenance labor 40% variable 75,000
Depreciation 0% variable 95,000
Rent, property taxes, and administration 0% variable 100,000

Gower, Inc., produced 75,000 units of product in 2017. Gower’s management is estimating costs
for 2018 on the basis of 2017 numbers. The following additional information is available for
2018.

a. Direct materials prices in 2018 are expected to increase by 5% compared with 2017.
b. Under the terms of the labor contract, direct manufacturing labor wage rates are expected to
increase by 10% in 2018 compared with 2017.
c. Power rates and wage rates for supervision, materials handling, and maintenance are not
expected to change from 2017 to 2018.
d. Depreciation costs are expected to increase by 5%, and rent, property taxes, and administration
costs are expected to increase by 7%.
e. Gower expects to manufacture and sell 80,000 units in 2018.

Required:
1. Prepare a schedule of variable, fixed, and total manufacturing costs for each account category in
2018. Estimate total manufacturing costs for 2018.
2. Calculate Gower’s total manufacturing cost per unit in 2017, and estimate total manufacturing
cost per unit in 2018.
3. How can you obtain better estimates of fixed and variable costs? Why would these better
estimates be useful to Gower?

SOLUTION

(30 min.)   Account analysis method.

1. Manufacturing cost classification for 2017:

% of 
Total Costs That
Total is  Variable Fixed Variable
Costs Variable Costs Costs Cost per Unit
 Account (1) (2) (3) = (1) × (4) = (1) – (5) = (3) ÷
(2) (3) 75,000

Direct materials $300,000 100% $300,000 $          0 $4.00

Direct manufacturing 225,000 100 225,000 0 3.00
labor 37,500 100 37,500 0 0.50
Power 56,250 20 11,250 45,000 0.15
Supervision labor 60,000 50 30,000 30,000 0.40
Materials-handling labor 75,000 40 30,000 45,000 0.40
Maintenance labor 95,000 0 0 95,000 0
Depreciation   100,000 0              0   100,000   0
Rent, property taxes,  
admin 
Total $948,750 $633,750 $315,000 $8.45

Total manufacturing cost for 2017 = $948,750

Variable costs in 2018:

Unit Variable
Cost per Unit for Increase in
2017 Variable Cost  Variable
(6) Percentage per Unit Cost per Total Variable
Increase (8) = (6) × (7) Unit  Costs for 2018
Account (7) for 2018  (10) = (9) ×
(9) = (6) + (8) 80,000

Direct materials $4.00 5% $0.20 $4.20 $336,000

Direct 3.00 10 0.30 3.30 264,000
manufacturing 0.50 0 0 0.50 40,000
labor 0.15 0 0 0.15 12,000
Power 0.40 0 0 0.40 32,000
Supervision labor 0.40 0 0 0.40 32,000
Materials- 0 0 0 0 0
handling labor  0 0  0    0              0
Maintenance labor
Depreciation
Rent, property
taxes, admin.
Total $8.45 $0.50 $8.95 $716,000

Fixed and total costs in 2018:

Dollar Increase in
Fixed Fixed Costs Fixed Variable Costs Total
Costs Percentag (13) = Costs for 2018 Costs
for 2018 e (11) × (12) for 2018 (15) (16) =
Account (11) Increase (14) = (14) + (15)
(12) (11) + (13)

Direct materials $           0 0% $    0 $           0 $336,000 $  336,000

Direct 00 0 0 264,000 264,000
manufacturing labor 0 0 0 0 40,000 40,000
Power 45,000 0 0 45,000 12,000 57,000
Supervision labor 30,000 0 0 30,000 32,000 62,000
Materials-handling 45,000 0 0 45,000 32,000 77,000
labor 95,000 5 4,750 99,750 0 99,750
Maintenance labor   100,000 7     7,000   107,000              0      107,000
Depreciation
Rent, property
taxes, admin.
Total $315,000 $11,750 $326,750 $716,000 $1,042,750

Total manufacturing costs for 2018 = $1,042,750

2. Total cost per unit, 2017 =  =  $12.65

Total cost per unit, 2018 =  =  $13.03

3. Cost classification into variable and fixed costs is based on qualitative, rather than
quantitative, analysis. How good the classifications are depends on the knowledge of individual
managers who classify the costs. Gower may want to undertake quantitative analysis of costs,
using regression analysis on time-series or cross-sectional data to better estimate the fixed and
variable components of costs. Better knowledge of fixed and variable costs will help Gower to
better price his products, to know when he is getting a positive contribution margin, and to better
manage costs.