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 plants 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 supervisors 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

Create and excel spreadsheet for the problem. 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.)

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?