Problem 1-23A Cost Classification and Cost Behavior Heritage Company manufacture

Question

Problem 1-23A Cost Classification and Cost Behavior

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 4,100 bookcases per year. Annual cost data at full capacity follow:

  Direct materials used (wood and glass)----------------- $ 429,000   
  Administrative office salaries -----------------$ 109,000   
  Factory supervision -----------------$ 67,000   
  Sales commissions -----------------$ 55,000   
  Depreciation, factory building-------------- $ 109,000   
  Depreciation, administrative office equipment ----------$ 1,000   
  Indirect materials, factory----------------- $ 19,000   
  Factory labor (cutting and assembly)------------ $ 88,000   
  Advertising -----------------$ 96,000   
  Insurance, factory -----------------$ 7,000   
  Administrative office supplies (billing) -----------------$ 5,000   
  Property taxes, factory----------------- $ 22,000   
  Utilities, factory----------------- $ 49,000   

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 either variable or fixed with respect to the number of units produced and sold; and second, as either 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.) (Leave no cells blank - be certain to enter "0" wherever required.)

2. Compute the average product cost per bookcase. (Round your answer to the nearest dollar amount.)

3. Due to a recession, assume that production drops to only 2,000 bookcases per year. Would you expect the average product cost per bookcase to increase, decrease, or remain unchanged?

Explanation / Answer

(1) & (2)

(3)

Since product cost is a variable cost that depends on units of output produced, a decrease in production will keep the average prodict cost unchanged (but total product cost will decrease proportionately with number of bookcases).

(values in $) Variable Fixed Selling/Admin Product Cost Direct Indirect Direct material 4,29,000 0 0 4,29,000 0 Admin Salaries 0 1,09,000 1,09,000 0 0 Factory supervision 0 67,000 0 0 67,000 Sales commission 55,000 0 55,000 0 0 Depr, Factory building 0 1,09,000 0 0 1,09,000 Depr, Admin office 0 1,000 1,000 0 0 Indirect material, Factory 19,000 0 0 0 19,000 Factory labor 88,000 0 0 88,000 0 Advertising 0 96,000 96,000 0 0 Insurance, Factory 0 7,000 0 0 7,000 Admin office supplies 0 5,000 5,000 0 0 Property tax, Factory 0 22,000 0 0 22,000 Utilities, factory 0 49,000 0 0 49,000 TOTAL COST (A) 5,91,000 4,65,000 2,66,000 5,17,000 2,73,000 Units of output (B) 4,100 Average product cost (A) / (B) 126

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