Question

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

Answer 1

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)