PROBLEM 2–13 Cost Classification

PROBLEM 2–13 Cost Classification [LO2, LO5, LO6]

Cycle Business manufactures and sells road and mountain bikes through a network of retail outlets in western Canada. Below is a partial list of expense items incurred in the most recent month (November), when 1,000 bicycles were manufactured, shipped, and sold. There was no beginning or ending work in process or finished goods inventory in November:

Units produced and sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	900	1,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$900,000	$1,000,000
Leather used for the bicycle seats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27,000	30,000
Production manager’s salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6,000	6,000
Life insurance for the company president. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	200	200
Electricity used in the production facilities* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,000	1,100
Sales commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	45,000	50,000
Internet advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,000	1,000
Employee benefits for the production workers† . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18,000	20,000
Property taxes on the production facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,000	1,000
Shipping costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	45,000	50,000
Salary of the chief financial officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10,000	10,000

Required:

1. With respect to the partial list of November expenses, answer the following:

a. Which items represent variable manufacturing costs?

b. Which items represent fixed manufacturing costs?

c. If the bicycle is the cost object, which items from (a) and (b) above are direct costs and which are indirect costs?

d. Which items would be classified as selling expenses?

e. Which items would be classified as administrative expenses?

2. Assume that 1,200 bicycles will be manufactured and sold in December. For the items you classified as manufacturing costs in (1), estimate the cost for December. Assume that there will be no change in unit costs for any direct materials, hourly wages will remain the same, and employee benefits will continue at 20% of wages.

10 years ago

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