Question: 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.

1. Explain what is involved in a product costing system.

2. Explain why Wilson-West Manufacturing needs to have a product costing system.

3. Allocate the above expenses as fixed, mixed, or variable expenses.

4. 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.

5. Explain this to Mr. Smith who will prepare these calculations on a monthly basis.