Question

Hamwey​, Inc., a manufacturer of plastic​ products, reports the following manufacturing costs and account analysis classification for the year ended December​ 31, 2014.

Account	Classification	Amount
Direct materials	All variable	$271,250
Direct manufacturing labor	All variable	193,750
Power	All variable	19,375
Supervision labor	25% variable	31,000
Materials-handling labor	60% variable	62,000
Maintenance labor	50% variable	69,750
Depreciation	0% variable	95,000
Rent, property taxes, and administration	0% variable	115,000

Hamwey, Inc., produced 77,500 units of product in 2014. Hamwey​'s management is estimating costs for 2015 on the basis of 2014 numbers. The following additional information is available for 2015.

a.

Direct materials prices in 2015 are expected to increase by 88​% compared with 2014.

b.

Under the terms of the labor​ contract, direct manufacturing labor wage rates are expected to increase by 12​% in 2015 compared with 2014.

c.

Power rates and wage rates for​ supervision, materials​ handling, and maintenance are not expected to change from 2014 to 2015.

d.

Depreciation costs are expected to increase by 99​%, and​ rent, property​ taxes, and administration costs are expected to increase by 88​%.

e.

Hamwey expects to manufacture and sell 87,500 units in 2015.

1.	Prepare a schedule of​ variable, fixed, and total manufacturing costs for each account category in 2015. Estimate total manufacturing costs for 2015.
2.	Calculate Hamwey​'s total manufacturing cost per unit in 2014​, and estimate total manufacturing cost per unit in 2015.
3.	How can you obtain better estimates of fixed and variable​ costs? Why would these better estimates be useful to Hamwey​?

Answer 1

2	Total manufacturing costs per unit
	Year	Total Manufacturing cost	No of units	Cost per unit
	2014	857,125	77500	11.06
	2015	1,493,550	87500	17.07

3. The classification of costs into variable and fixed costs is based on a qualitative analysis rather than that of a quantitative analysis. Managers tend to use this approach because it helps determine indirect labor costs for each driver. This method helps in decision making process viz better pricing, Costs control and maintain a positive contribution margin in order to continue the product line..