Question

The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The company has enough customer demand to justify producing its full capacity of 3,900 sets per year. Annual cost data at full capacity follow: Direct labor $ 90,000 Advertising $ 99,000 Factory supervision $ 72,000 Property taxes, factory building $ 15,000 Sales commissions $ 55,000 Insurance, factory $ 5,000 Depreciation, administrative office equipment $ 2,000 Lease cost, factory equipment $ 15,000 Indirect materials, factory $ 18,000 Depreciation, factory building $ 103,000 Administrative office supplies (billing) $ 3,000 Administrative office salaries $ 112,000 Direct materials used (wood, bolts, etc.) $ 428,000 Utilities, factory $ 48,000

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.

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?

Answer 1

1). The bifurcation is as per the table below:

Particulars	Fixed/Variable	Product/ Selling and Administrative	If product Cost- Direct or Indirect
Direct Labour	Variable	Product	Direct
Advertising	Fixed	Selling and Administration	NA
Factory Supervision	Fixed	Product	Direct
Factory Building Property Taxes	Fixed	Product	Indirect
Sales Commissions	Variable	Selling and Administration	NA
Insurance Factory	Fixed	Product	Indirect
Depreciation, office equipment	Fixed	Selling and Administration	NA
Lease cost, factory equipment	Fixed	Product	Indirect
Indirect Materials, Factory	Variable	Product	Indirect
Depreciation, Factory Building	Fixed	Product	Indirect
Administrative office supplies (billing)	Variable	Selling and Administration	NA
Administrative office supplies	Fixed	Selling and Administration	NA
Direct Materials used	Variable	Product	Direct
Utlilities, Factory	Fixed	Product	Indirect

2). COGS = Direct Labor + Factory Supervision + Property Taxes, Factory Building + Insurance, Factory + Lease Cost, factory Equipment + Indirect Materials, Factory + Depreciation, Factory Building + Direct Materials + Utilities, factory

= $90,000 + $72,000 + $15,000 + $5,000 + $15,000 + $18,000 + $103,000 + $428,000 + $48,000

= $794,000

Cost p.u. = COGS / Total Units = $794,000 / 3,900 = $203.59

3). The average cost would increase if the production falls to 1,000 units as because fixed cost will continue to incur at the same amount however variable cost would fall. Since fixed cost is still being charged at higher amounts hence the average cost will rise.