Question

QUESTION 1.

The Interiors Company located in Dominica manufactures executive desks. Selected costs associated with the manufacture of the executive desks and the general operations of the company are given below:

a)    Wood used in the manufacture of the executive desks, at a cost of $500 per desk.

b)    The executive desks are assembled by workers, at a cost of $100 per desk.

c)    Workers assembling the executive desks are supervised by a factory supervisor who is paid $75,000 per year.

d)    Electrical cost of $50 per machine-hour are incurred in the factory in the manufacture of the executive desks (five machine hours are required to produce a desk).

e)    The depreciation cost of the machines used in the manufacture of the executive desks totals $5,000 per year.

f)     The salary of the president of the Company is $250,000 per year.

g)    The Company spends $100,000 per year to advertise its products.

h)    Salespersons are paid a commission of $80 for each desk sold.

Questions:

1. Identify the variable costs in the case above.

2. Identify the Fixed costs in the case above.

3. In your own words, explain the difference between product and period cost.

4. Identify the Period costs in the case above.

5. Identify the Product cost in the case above.

6. In your own words, explain the difference between direct and indirect cost.

7. Identify the direct cost in the case above.

8. Identify the indirect cost in the case above

Answer 1

3. In simple words, Product cost will be defined as the cost which can be directly allocated to the product, where as the period cost will be defined as the cost which is pertaining to a particular period which should be allocated towards all the products produced during the period. Product costs will be variable costs where as the period costs are Fixed costs.

6. Direct costs will be defined as the costs which can be directly attributable to a particular product where as the indirect costs will be defined as the costs which cannot be accurately attributed to specific cost objects. These typically benefit multiple cost objects and it is impracticable to accurately trace them to individual products, activities or departments etc