VI. LEARNING ACTIVITIES

A. Classifying Costs.Julita Shirt Shop manufactures T-shirts and decorates them with custom designs for retail sale on premises. Several costs incurred by the company are listed below. For each cost, indicate which of the following classifications best describes the cost.

Cost classifications

1. Administrative
2. Selling
3. Research & Development
4. Direct Material
5. Direct Labor
6. Manufacturing Overhead

Cost Items

1. Cost of fabric used in T-shirts.
2. Wages of shirt makers.
3. Cost of new sign in front of retail T-shirt shop.
4. Wages of employee who repairs the firm's sewing machines.
5. Cost of electricity used in the sewing department.
6. Wages of T-shirt designers and painters.
7. Wages of sales personnel.
8. Depreciation of sewing machines.
9. Rent on Building. Part of the buildings first floor is used to make and paint T-shirts. Part of it is used for the retail sales shop. The second floor is used for administrative offices and storage of raw material and finished goods.
10. Cost of daily advertisements in local media.
11. Wages of designers who experiment with new fabrics, paints and T-shirt designs.
12. Cost of hiring a pilot to fly along the beach pulling the banner advertising shop.
13. Salary of owner's secretary.
14. Administrative manager's salary.
15. Cost of insurance for the production employees.

1. Love Ship, Inc., assembles customs sailboats from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in ta boathouse. Below are listed some of the costs that are incurred at the company.

Required: For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling or an administrative cost.

1. The wages of employees who build the sailboats.
2. The cost of advertising in the local newspaper.
3. The cost of an aluminum mast installed in a sailboat.
4. The wages of the assembly shop's supervisor.
5. Rent on the boathouse.
6. The wages of the company's bookkeeper.
7. Sales commission paid to the company's salespeople.
8. Depreciation on power tools.

2. Ilang-Ilang Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company's cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 13.6 cents per mile.

Required:

1. Using the high-low point method, determine the variable and fixed cost elements of the annual cost of truck operation.
2. Express the variable and fixed costs in the form Y=a+bX.
3. If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?