Question

Cycle Business manufactures and sells road and mountain bikes through a network of retail outlets in western Canada. Below is a partial list of expense items incurred in the most recent month (November), when 1,060 bicycles were manufactured, shipped, and sold. There was no beginning or ending work in process or finished goods inventory in November:

Item	October			November
Units produced and sold		960			1,060
Sales	$	960,000		$	1,060,000
Leather used for the bicycle seats		34,560			38,160
Production manager’s salary		6,300			6,300
Life insurance for the company president		230			230
Electricity used in the production facilities*		2,050			2,250
Sales commissions		45,600			50,720
Internet advertising		1,100			1,100
Employee benefits for the production workers↑		19,200			21,200
Property taxes on the production facilities		1,300			1,300
Shipping costs		45,600			50,720
Salary of the chief financial officer		10,600			10,600
*Each month, regardless of how much electricity is used, Cycle Business pays a $130 base charge to the utilities company.
↑Employee benefits total 20% of the wages paid to production workers, who on average earn $20 per hour. Each bicycle requires 5 hours of direct labour.

Required:

1. With respect to the partial list of November expenses:

1. Use the Type column to label each item as a Manufacturing, Administrative, or Selling cost.
2. For those items you labeled as a Manufacturing cost,

1. Use the Behaviour column to label each item as variable or fixed manufacturing costs.
2. Use the Direct/Indirect column to label each item as a direct or indirect cost.

2. Assume that 1,260 bicycles will be manufactured and sold in December. For the items you classified as manufacturing costs in requirement 1, estimate the cost for December. Assume that there will be no change in unit costs for any direct materials, hourly wages will remain the same, and employee benefits will continue at 20% of wages.

Answer 1

1.

	Type	Behaviour	Direct/Indirect
Leather used for the bicycle seats	Manufacturing	Variable	Direct
Production manager’s salary	Manufacturing	Fixed	Indirect
Life insurance for the company president	Administrative
Electricity used in the production facilities	Manufacturing	Variable/Fixed	Indirect
Sales commissions	Selling
Internet advertising	Selling
Employee benefits for the production workers	Manufacturing	Variable	Indirect
Property taxes on the production facilities	Manufacturing	Fixed	Indirect
Shipping costs	Selling
Salary of the chief financial officer	Administrative

2.

Manufacturing Costs	Amount $
Leather used for the bicycle seats ($34560/960 x 1260)	45360
Production manager’s salary	6300
Electricity used in the production facilities*	2650
Employee benefits for the production workers ($19200/960 x 1260)	25200
Property taxes on the production facilities	1300
Cost for December $	80810

*Variable cost of electricity per bicycle = ($2050 - $130)/960 = $1920/960 = $2

Electricity cost for December = [$130 + (1260 x $2)] = $130 + $2520 = $2650