Question

LAB #1

Chapter 1

Cost Classifications

OBJECTIVE: Apply appropriate cost classifications and use to determine average cost per unit.

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Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity. The company has a backlog of orders that is large enough to keep production going indefinitely at the plant’s full capacity of 4,000 bookcases per year. Annual cost data at full capacity follow:

                                                                                                               

COST DESCRIPTION	AMOUNT
Direct materials used (wood and glass)	$430,000
Administrative salaries	110,000
Factory supervisor’s salary	70,000
Sales commissions	60,000
Depreciation, factory building	105,000
Depreciation, administrative office equipment	2,000
Indirect materials, factory	18,000
Factory labor (cutting and assembly)	90,000
Advertising	100,000
Insurance, factory	6,000
Property taxes, factory	20,000
Annual rental payment, factory machinery	45,000

INSTRUCTIONS: (REMINDER - You should use Excel formulas to make the calculations in #2-#5)

Enter each cost item in the appropriate column on your spreadsheet. Each item should be classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either a period cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.) This has been done already for the first two cost items as an example.

Total the dollar amounts in each of the columns on your spreadsheet.

Compute average cost to manufacture a bookcase at the given activity level.

What is total prime cost?

What is total conversion cost?

NAME:
LAB 1			Cost Behavior			Period		Product Cost
	COST ITEM		Variable	Fixed		Cost		Direct	Indirect
1	Direct materials used (wood and glass)		430,000					430,000
	Administrative office salaries			110,000		110,000
	Factory supervisor's salary
	Sales commissions
	Depreciation, factory building
	Depreciation, administrative office equipment
	Indirect materials, factory
	Factory labor (cutting and assembly)
	Advertising
	Insurance, factory
	Property taxes, factory
	Annual rental payment, factory machinery
2	TOTALS
3	Average cost to manufacture one bookcase
4	Total prime cost
5	Total conversion cost

Answer 1

				Cost Behaviour		Period	Product Cost
				Variable	Fixed		direct	Indirect
Direct materials used(wood and glass)				430,000			430,000
Administrative salaries					110,000	110,000
Factory supervisor's salary					70,000			70,000
Sales commissions				60,000		60,000
Depreciation,Factory building					105,000			105,000
Depreciation,administrative office equipment					2,000	2,000
indirect materials,Factory				18,000				18,000
Factory labor (cutting and assembly)				90,000			90,000
Advertising					100,000	100,000
Insurance,Factory					6,000			6,000
property taxes,factory					20,000			20,000
Annual rental payment,factory machinery					45,000			45,000
totals				598,000	458000	272000	520,000	264000
3)	Average cost to manufacture one bookcase
	(520,000+264000)/4,000
	196
4)	Total prime cost
	Direct materials + direct labor
	520,000
5)	total conversion cost
	Direct labor + factory overhead
	90,000+264000
	354000