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 4,000 sets per year. Annual cost data at full capacity follow: Direct labor $ 90,000 Advertising $ 99,000 Factory supervision $ 74,000 Property taxes, factory building $ 20,000 Sales commissions $ 55,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 3,000 Lease cost, factory equipment $ 14,000 Indirect materials, factory $ 20,000 Depreciation, factory building $ 101,000 Administrative office supplies (billing) $ 4,000 Administrative office salaries $ 112,000 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. 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

Solution 1:

Classification of Costs
Cost Item	Amount	Cost classification
		Variable or Fixed	Selling and Administrative or Product Cost	Direct/ Indirect
Direct labor	$90,000.00	Variable Cost	Product Cost	Direct
Advertising	$99,000.00	Fixed Cost	Selling & Administrative Cost
Factory Supervision	$74,000.00	Fixed Cost	Product Cost	Indirect
Property taxes, factory building	$20,000.00	Fixed Cost	Product Cost	Indirect
Sales commissions	$55,000.00	Variable Cost	Selling & Administrative Cost
Insurance, factory	$6,000.00	Fixed Cost	Product Cost	Indirect
Depreciation, administrative office equipment	$3,000.00	Fixed Cost	Selling & Administrative Cost
Lease cost, factory equipment	$14,000.00	Fixed Cost	Product Cost	Indirect
Indirect materials, factory	$20,000.00	Variable cost	Product Cost	Indirect
Depreciation, factory building	$101,000.00	Fixed Cost	Product Cost	Indirect
Administrative office supplies (Biling)	$4,000.00	Fixed Cost	Selling & Administrative Cost
Administrative office salaries	$112,000.00	Fixed Cost	Selling & Administrative Cost
Direct materials used	$426,000.00	Varible cost	Product Cost	Direct
Utilities, factory	$43,000.00	Varible cost	Product Cost	Indirect

Solution 2:

Computation of average product cost of one patio set - Dorilane Company
Particulars	Amount
Direct materials used	$426,000.00
Direct labor	$90,000.00
Manufacturing overhead:
Factory Supervision	$74,000.00
Property taxes, factory building	$20,000.00
Insurance, factory	$6,000.00
Lease cost, factory equipment	$14,000.00
Indirect materials, factory	$20,000.00
Depreciation, factory building	$101,000.00
Utilities, factory	$43,000.00
Total Manufacturing costs	$794,000.00
Nos of Patio set produced	4000
Cost per patio set	$198.50

Solution 3:

If production drops to 1000 sets annually, then average product cost per set will increase as fixed cost will be charged on lesser number of units.