Problem 124A Cost Classification and Cost Behavior LO11 LO12

Problem 1-24A Cost Classification and Cost Behavior [LO1-1, LO1-2, LO1-3, LO1-4] The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 4,200 sets per year. Annual cost data at full capacity follow: Direct labor $ 92,000 Advertising $ 99,000 Factory supervision $ 67,000 Property taxes, factory building $ 18,000 Sales commissions $ 65,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 2,000 Lease cost, factory equipment $ 17,000 Indirect materials, factory $ 20,000 Depreciation, factory building $ 108,000 Administrative office supplies (billing) $ 5,000 Administrative office salaries $ 114,000 Direct materials used (wood, bolts, etc.) $ 426,000 Utilities, factory $ 43,000 Required: 1. Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.) 2. Compute the average product cost of one patio set. (Round your answer to nearest whole dollar.) 3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged? Increase Decrease Remain unchanged

Solution

1) Cost behaviour Selling or Administrative cost Product Cost Cost Item Variable Fixed Direct Indirect Direct labor 92000 92000 Advertising 99000 99000 Factory supervision 67000 67000 Property taxes, factory building 18000 18000 Sales commissions 65000 65000 Insurance, factory 6000 6000 Depreciation-Admn office eqpmt 2000 2000 Lease cost factory equipment 17000 17000 Indirect materials, factory 20000 20000 Depreciation-Factory building 108000 108000 Administrative office supplies 5000 5000 Administrative office salaries 114000 114000 Direct materials used 426000 426000 Utilities, factory 43000 43000 651000 431000 285000 518000 279000 2) Average product cost = (518000+279000)/4200 = $       189.76 3) The average product cost would increase. (as the cost per unit of fixed cost will increase)