Assignment 2
Cost Terms, Concepts, and Classifications

P 2-21: Variable and Fixed Costs; Subtleties of Direct and Indirect Costs

P 2-24: Schedule of Cost of Goods Manufactured; Income Statement; Cost Behaviour

1.

*** Computations: Direct Labour = $675,000 - 270,000 - 340,000 = $65,000 Beg. WIP = $720,000 – 30,000 + 33,000 – 675,000 = $48,000 End. Finished Goods = $720,000 – 635,000 = $85,000

2.

3. Based on the assumption that the company expects to produce 50,000 units in the following year, the average cost per unit and total cost for direct materials and for rent on the factory building are as follows:

Direct materials: i) Since direct material is classified as a variable cost, the average cost per unit for direct materials is $9.00 ($450,000/50,000 units) ii) Total cost for direct materials = $9 x 50,000 units = $450,000

Rent on the factory building: i) Since rent on the factory building is classified as a fixed cost, the average cost per unit = $90,000/50,000 units = $1.80 per unit; ii) Total cost for rent on the factory building = $90,000 (no change)

4. When considering the differences in the average costs per unit between variable and fixed costs, it is important to highlight the impact that changes in the activity level have on direct materials (variable cost) and rent on the factory building (fixed cost). Specifically, when there is an increase in the units of production, total variable cost will also increase with respect to production and vice versa when production decreases. However, the average unit cost will not change, providing the change in activity level remains in the relevant range. Therefore, as illustrated above, the average variable unit cost will remain at $9.00, but the total variable cost will increase as production increases.

Conversely, rent on the factory building is classified as