Question

Scenario: Prior to Opening, Part I: You plan to open a pet-services business that will offer dog grooming, day care, and boarding. You can be creative in deciding the name of your business (e.g., “Inspiring Dog Care”), its geographical location (e.g., Chicago), and its mission and vision for adding value to the community. You will be asked to make choices for a few other details to customize your case; otherwise, you should use the information below. There are 12 kennels (single dog only) and the day care area can house 10 large dogs and 12 small dogs each day. The grooming facility is 200 square feet, the boarding facility is 2,500 square feet, and the day care is 1,500 square feet. Your groomer can groom five dogs a day for five days a week; each groom consists of 1.5 labor hours. You also offer dog day care six days a week, and kenneling every day. You have taken out a loan for start-up costs and the monthly payment is $420; it goes into effect immediately and should be accounted for in your costs. With limited cash contribution and loan funding, you located two angel investors. You will collect a modest draw for the first year of $600 a month; remember to divide evenly among the services. Note: For simplicity, base all calculations using 30 days in each month.

You have hired the following people:

? A groomer, Allison, who will be paid $12/hour and work 40 hours a week

? A day care attendant, Beverly, who will be paid $9/hour and will work based on need

? A receptionist, Cathie, who will be paid $8.50/hour and work 30 hours a week

? A kennel attendant, Ben, who will be paid $11.50/hour and will work based on need A complete list of additional costs is provided below:

? Food and water bowls: $3.59/unit o Daycare: Two bowls last for every 75 dogs that attend daycare. o Boarding: Two bowls last for every 100 dogs that are boarded; you need two bowls per kennel. o Grooming: Each bowl lasts for 20 grooms and you need four bowls at all times.

? Fencing for daycare area: $1,249

? Installation of fencing: $1,000

? Dog grooming arm: $300

? 12 kennels: $9,500

? Kennel depreciation is $80/month

? Rent: $650/month; allocate based on square footage

? Utilities/insurance: $600/month; allocate based on square footage

? Grooming table: $900

? Grooming tub: $2800

? Heating system: $10,000

? Heating system depreciation is $83/month; allocate based on square footage

? Clippers: $136.99; can be used for 100 grooms

? Shampoo: $103.96 per five-gallon pail, which can be used for 100 grooms

? Cage bank: $2200 per set of 5

? Salon Tuff Capri mobile carry cart: $90

? Towels: $34.99 per 12 pack o Day care: You need to have 12 towels for every 25 dogs. o Boarding: You need to have 12 towels for every 40 dogs. o Grooming: You need to have two towels for every groom per day.

? Scissors: (1) 7-inch straight is $194.99, and (1) ear-and-nose is $7.49; each can be used for 200 grooms.

? Toys: $3.29 per 6-pack; one toy will last for two dogs in day care, per day.

? Cleaning products: o Odoban: $14.55/gallon: Each area will dilute 1 oz to 1 gallon of water; allocate based on square footage. o Simple Green: $15.66/gallon: each area will dilute 1 oz to 1 gallon of water; allocate based on square footage.

? Dryer: $1250

? Rubberized flooring for day care: $3800

? You have taken out a loan for start-up costs and the monthly payment is $420; it goes into effect immediately and should be accounted for in your costs.

? You will collect a modest draw for the first year of $600 a month

*FOR EACH ABOVE ITEM OR COST, CLASSIFY AS: DIRECT MATERIALS, DIRECT LABOR, MANUFACTURING OVERHEAD OR PERIOD COST*

Answer 1

The cost classification helps in decision making process more accurate. Certain costs are fixed in nature and are mandatory to be incurred while others costs are directly related to production and hence can be avoided and serve as relevant costs for decision making.

Cost which are directly related to the production / providing the service are called direct costs eg. direct labour, direct materials etc. These can be directly attributable to the each unit of production. T

he costs which are related to maintenance of the factory, statutory requirements etc. are called overheads or period costs. These are not necessarily part of manufacturing process. Eg. Depreciation, general and administrative expenses, rent etc.

The classification of the costs is as below:

? A groomer, Allison, who will be paid $12/hour and work 40 hours a week

Groomer cost is directly related to the service cost and hence falls under the category of the direct labour cost.

? A day care attendant, Beverly, who will be paid $9/hour and will work based on need

As the day care attendant works only on need basis, even the cost incurred would be directly attributable to services and hence is considered as direct labour

? A receptionist, Cathie, who will be paid $8.50/hour and work 30 hours a week

The receptionist cost is an indirect cost and is not directly related to any payable services. Hence the cost falls under the category of the Overheads.

? A kennel attendant, Ben, who will be paid $11.50/hour and will work based on need

The Kennel attendant works on need basis and hence is directly related to the services provided. Therefore the cost is direct labour.

A complete list of additional costs is provided below:

? Food and water bowls: $3.59/unit o Daycare: Two bowls last for every 75 dogs that attend daycare. o Boarding: Two bowls last for every 100 dogs that are boarded; you need two bowls per kennel. o Grooming: Each bowl lasts for 20 grooms and you need four bowls at all times.

The food and water bowls are required to feed the dogs which is directly related to the service and th use of the bowls will not be there if there is no service provided. Hence falls under the category of the Direct Material.

? Fencing for daycare area: $1,249

Fencing for the day care area is a fixed cost as the benefit of the same can be derived in multiple periods. Depreciation expense on the fencing area would fall under the category of the Period cost

? Installation of fencing: $1,000

Installation cost would form part of the fixed asset created for fencing and hence the same accounting treatment of fencing i.e., total cost is considered as a fixed asset and depreciation on the same would be Period cost.

? Dog grooming arm: $300

These are direct costs as the grooming arms are required for the services provided and will be expended only when the service takes place. Hence Dog grooming arms is to be considered as direct material.

? 12 kennels: $9,500

Kennels is a fixed expense and depreciation on the same is considered as period cost.

? Kennel depreciation is $80/month

Depreciation as explained above is a period cost.

? Rent: $650/month; allocate based on square footage

Rent is to be paid irrespective of the business being carried on or not. Hence the expense falls under the category of period cost.

? Utilities/insurance: $600/month; allocate based on square footage

Utilities, insurance again are to be incurred irrespective of the business and hence are indirect costs and fall under the category of the period costs.

? Grooming table: $900

Grooming table is a fixed asset and depreciaiton on the same would be a period cost. The cost incurred on the table and depreciation are to be borne irrespective of it being used or not and hence it is not a direct cost.

? Grooming tub: $2800

Grooming tub as Grooming table is a fixed asset and depreciaiton on the same would be a period cost.

? Heating system: $10,000

Heating system as Grooming tub and Grooming table is a fixed asset and depreciaiton on the same would be a period cost.

? Heating system depreciation is $83/month; allocate based on square footage

Though the cost is allocated based on the square footage, the cost is incurred irrespective of the business area and hence the cost is a period cost.

? Clippers: $136.99; can be used for 100 grooms

These will be used only when the grooming happens and hence the expense would fall under the cateogry of the direct material.

? Shampoo: $103.96 per five-gallon pail, which can be used for 100 grooms

These will be used only when the grooming happens and hence the expense would fall under the cateogry of the direct material.

? Cage bank: $2200 per set of 5

Cage bank is a fixed asset and the depreciation would be period cost.

? Salon Tuff Capri mobile carry cart: $90

This is a fixed asset and the depreciation would be period cost.

? Towels: $34.99 per 12 pack o Day care: You need to have 12 towels for every 25 dogs. o Boarding: You need to have 12 towels for every 40 dogs. o Grooming: You need to have two towels for every groom per day.

These expenses would fall under the cateogry of the direct materials, as these would be used only when the service is provided.

? Scissors: (1) 7-inch straight is $194.99, and (1) ear-and-nose is $7.49; each can be used for 200 grooms.

These expenses again would fall in the cateogry of the direct material as the usage is directly attributable to cost.

? Toys: $3.29 per 6-pack; one toy will last for two dogs in day care, per day.

Direct expenses as the cost the directly attributable to the services provided.

? Cleaning products: o Odoban: $14.55/gallon: Each area will dilute 1 oz to 1 gallon of water; allocate based on square footage. o Simple Green: $15.66/gallon: each area will dilute 1 oz to 1 gallon of water; allocate based on square footage.

These are the Manufacturing overheads incurred as the costs are not directly attributable to the services provided.

? Dryer: $1250

Fixed asset and depreciation is period cost

? Rubberized flooring for day care: $3800

Fixed asset and depreciation is period cost

? You have taken out a loan for start-up costs and the monthly payment is $420; it goes into effect immediately and should be accounted for in your costs.

Repayment of loan is a financial transaction while the interest part of it is to be considered as the Manufacturing overhead or period costs.

? You will collect a modest draw for the first year of $600 a month

This is the dividend paid the business and is an appropriation of the income statement. It does not fall under the category of any of the above costs.