LAB #1 Chapter 1 Cost Classifications OBJECTIVE: Apply appropriate cost classifi
ID: 2330095 • Letter: L
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?
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
Explanation / Answer
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
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