B.

Manufacturing Costs
In a manufacturing business, costs are divided in three categories called cost elements.
These costs are also called production or manufacturing costs.
Direct materials include all the materials that form part of the finished product
whose value is material and part of the production cost of the product. A t-shirt you
wore is made of cotton, and such is a direct material. One of the inherent
characteristics of raw material as part of the cost is clearly identified with the
finished product.
Examples are lumber used in the production of furniture and frame; flour in the
production of bread and pastries; paper in the production of books; and bond paper
used in the photocopying business. Raw material used in the production of the product,
whose identity is not identified with the finished product is called indirect material.
Thread used in garment production is an example of indirect materials.

Illustration:

Assuming Kababayan Resto Bar made purchases of different ingredients for the main
menus of the occasion for 120 guests:

Cost of pork, fish, shrimp, beef P 9,450

Cost of vegetables 1,090
Cost of fruits 1,200
Cost of wines 3,000
Cost of added ingredients 2,400
Total cost of direct materials P 17,140

Cost of direct material per person = Total cost of direct materials / No. of guests

Thus = P17,140 / 120 guests

= P 142.83

Direct labor refers to labor time used in the conversion of raw materials to finished
product. This kind of cost is also identified with the finished product and can be
calculated in terms of quantity and cost. Labor cost that cannot be identified with the
finished product is called indirect labor. Labor paid daily or hourly can be identified
with a portion of work produced.
Assuming in that occasion the following will be hired: two chefs, two service attendants
and four waiters for a total cost of P3,200. How much is the direct labor per person?
Labor Unit cost per person = Total labor cost / No. of unit produced
= P3,200 / 120 persons
= P 26.67
Example is the wage of the sewer in the garment factory for the production of pants,
polo and t- shirt. The salary of the sewer is attributed with the number of products
produced. The owner has the basis of calculating how many pieces of finished products
are produced by one sewer for one day or for an hour. The salary of a supervisor and
a janitor which cannot be identified with the finished product is called indirect labor.
In a restaurant and hotel business, direct labor includes salaries of chef, bell boy, food
attendant, and waiter.
Factory overhead, also called manufacturing overhead is composed of manufacturing
expenses or manufacturing cost other than direct materials and direct labor. This kind
of expense will include indirect materials, indirect labor and all other costs that cannot
be directly identified to the finished menu such as salt, soy sauce, vinegar, tomatoes,
onion and other ingredients. In the industrial aspect, examples of indirect materials
are oil, lubricants, nail, paint and glue. Indirect labor refers to the supervision and
maintenance costs, salary of the supervisor and driver that
cannot be identified with the product itself. Examples of other indirect costs are
depreciation of machinery and building and car, maintenance and repair costs, light
and power of the common facilities, small tools and other miscellaneous factory
overhead costs, supervision cost and cost of security guards and other costs.
Assuming total factory overhead amounted to P2,400, how much is the factory
overhead per piece? Answer: P2,400/120 person equals P20/person.
With these data, how much is the total manufacturing cost per unit?

Raw material/person P 142.83

Direct labor/person 26.67
Factory overhead per person 20.00
Total manufacturing cost per P 189.50
person
Questions:
1. How much is the gross profit assuming each person was charged P250?

Gross sales (P250 x 120 persons) P 30,000

Less: Total manufacturing cost (P189.50 x 120) 22,740
Gross profit on sale P 7,260
2. How much is the gross profit earned per person or customer?

Gross profit of P7,260 / 120 persons = P 60.50

3. If the occasion has 250 attendees or persons, how much is the gross profit?

Gross sales (P250 x 250 persons) P 62,500

Less: Total manufacturing cost (P189.50 x 250) 47,375
Gross profit on sale P 15,125

4. What is the percentage of gross profit on sale?

Gross profit / Gross sales = P15,125/P62,500 = 24.20%

5. How much is the net income per person if the operating expense per person is
P20?

Selling price per person P 250.00

Less: Cost per person 189.50
Gross profit per person P 60.50
Less: Operating expense per person 20.00
Net income per person P 40.50