Kirk Gaber, a tailor in his home country, recently immigrated to the United States. He is interested in starting a business making custom suits for men. Mr. Gaber is trying to determine the cost of making a suit so he can set an appropriate selling price. He estimates that his materials cost will range from $100 to $160 per suit. Because he will make the suits himself, he assumes there will be no labor cost. Some suits will require more time than others, but Mr. Gaber considers this fact to be irrelevant because he is personally supplying the labor, which costs him nothing. Finally, Mr. Gaber knows that he will incur some overhead costs such as rent, utilities, advertising, packaging, delivery, and so on; however, he is uncertain as to the exact cost of these items.
Required
a. Should Mr. Gaber use a job-order or a process costing system?
b. How can Mr. Gaber determine the cost of suits he makes during the year when he does not know what the total overhead cost will be until the end of the year?
c. Is it appropriate for Mr. Gaber to consider labor cost to be zero?
d. With respect to the overhead costs mentioned in the problem, distinguish the manufacturing overhead costs from the selling and administrative expenses. Comment on whether Mr. Gaber should include the selling and administrative expenses in determining the product cost if he uses cost plus pricing. Comment on whether the selling and administrative expenses should be included in determining the product cost for financial reporting purposes.
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