Various costs associated with the operation of a factory are given below:
1. Electricity used in operating machines
2. Rent on a factory building
3. Cloth used in drapery production
4. Production superintendent’s salary
5. Cost of labourers assembling a product
6. Depreciation of air purification equipment used in furniture production
7. Caretaker salaries
8. Peaches used in canning fruit
9. Lubricants needed for machines
10. Sugar used in soft-drink production
11. Property taxes on the factory
12. Cost of workers painting a product
13. Depreciation on cafeteria equipment
14. Insurance on a building used in producing TV sets
15. Picture tubes used in TV sets.

Required
Classify each cost as being either variable or fixed with respect to the number of units produced and sold. Also indicate whether each cost would typically be treated as a direct cost or an indirect cost with respect to units of product. Prepare your answer sheet as shown below:

The Dorilane Company specializes in producing a set of wooden patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:

Required
1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer sheet, placing the pound 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 variable or fixed, with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should be classified as being either direct or indirect as shown.)

2. Total the pound amounts in each of the columns in 1 above. Compute the cost to produce one patio set.
3. Assume that production drops to only 1,000 sets annually. Would you expect the cost per set to increase, decrease, or remain unchanged? Explain. No computations are necessary.
4. Refer to the original data. The managing director’s brother-in-law has considered making himself a patio set and has priced the necessary materials at a building supply shop. The brother-in-law has asked the managing director if he could purchase a patio set from the Dorilane Company ‘at cost’, and the managing director agreed to let him do so.
(a) Would you expect any disagreement between the two men over the price the brother-in-law should pay? Explain. What price does the managing director probably have in mind? The brother-in-law?
(b) Since the company is operating at full capacity, what cost term used in the chapter might be justification for the managing director to charge the full, regular price to the brother-in-law and still be selling ‘at cost’?

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Cost Item Example: Factory insurance Cost behaviour Variable Fixed X To units of product Direct Indirect X