978-0-07-802542-6 PROBLEM 2-24 PROBLEM 2–24 Cost Classification and Cost Behavio

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978-0-07-802542-6

PROBLEM 2-24

PROBLEM 2–24 Cost Classification and Cost Behavior [ LO 2–2 , LO 2–3 , LO 2–6 ]
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:

Direct materials used (wood and glass) . . . . . . . . . . . $430,000
Administrative office salaries . . . . . . . . . . . . . . . . . . . $110,000
Factory supervision . . . . . . . . . . . . . . . . . . . . . . . . . . $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
Administrative office supplies (billing) . . . . . . . . . . . . $4,000
Property taxes, factory . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Utilities, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,000

Required:
1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your
answer sheet, placing the dollar amount under the appropriate headings. As examples, this has
been done already for the first two items in the list above. 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 as shown.)

Cost Behavior
Selling or
Administrative
Cost
Product Cost
Cost Item Variable Fixed Direct Indirect*
Materials used . . . . . . . . . $430,000 $430,000
Administrative office
salaries . . . . . . . . . . . . . $110,000 $110,000

2. Total the dollar amounts in each of the columns in (1) above. Compute the average product
cost per bookcase.
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?
Explain. No computations are necessary.
4. Refer to the original data. The president’s next-door neighbor has considered making himself
a bookcase and has priced the necessary materials at a building supply store. He has asked the
president whether he could purchase a bookcase from the Heritage Company “at cost,” and
the president has agreed to let him do so.
a. Would you expect any disagreement between the two men over the price the neighbor
should pay? Explain. What price does the president probably have in mind? The neighbor?
b. Because the company is operating at full capacity, what cost term used in the chapter
might be justification for the president to charge the full, regular price to the neighbor and still be selling “at cost”? Explain.

Explanation / Answer

1)                                    cost behaviour                                             product cost

b) Average product cost = ($520,000 + $264,000)/ 4,000

                                            =$196

c)If the production drops product cost per unit will increase as the fixed cost is absorbed now by less units

4) Yes , they bound to disagree on cost , one would cost $1060,000 as total cost and the other only product cost of $784,000

b) Variable cost

Variable Fixed Selling and Adm cost Direct indirect direct materials used 430,000 430,000 Adm office salaries $110,000 $110,000 Facotry supervission     70,000 $70,000 Sales commisiion 60,000 60,000 Dep factory building 105,000 105,000 Dep adm office     2,000 2,000 Indirect materials 18,000 18,000 Factory labor 90,000 90,000 Advertising 100,000 100,000 Insuracne factory    6,000 6,000 Adm office supplies 4,000 4,000 Property taxes factory 20,000 20,000 Utilities factory 45,000 45,000 total cost 647,000 413,000 276,000 520,000 264,000

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