All of Jill Enterprise's operations are housed in one building with the costs of occupying the building accumulated in a separate account. The total costs incurred in May amounted to £24,000. The company allocates these costs on the basis of square feet of floor space occupied. Administrative offices, sales offices, and factory operations occupy 9,000, 6,000, and 30,000 square feet, respectively. How much will be classified as a product cost for May?
A)£4,800
B)£3,200
C)£16,000
D)£24,000

Question

Quizplus · Accepted Answer

Product costs are costs associated with the production of goods, including direct materials, direct labor, and factory overhead. In this case, the costs of occupying the building, which include rent, utilities, and other expenses, are considered factory overhead, a type of indirect cost.

To allocate the overhead costs to each department, the company uses the square feet of floor space occupied by each department as the basis. The total square footage of the building is 45,000 square feet (9,000 + 6,000 + 30,000).

To calculate the overhead cost per square foot, we divide the total May costs of £24,000 by the total square footage of the building:

£24,000 ÷ 45,000 sq. ft. = £0.533 per sq. ft.

Next, we allocate the overhead costs to each department:

- Administrative offices: £0.533/sq. ft. x 9,000 sq. ft. = £4,797 
- Sales offices: £0.533/sq. ft. x 6,000 sq. ft. = £3,198 
- Factory operations: £0.533/sq. ft. x 30,000 sq. ft. = £15,990

The overhead costs allocated to factory operations are considered part of the product costs, while the overhead costs allocated to administrative and sales offices are part of the period costs.

Therefore, the amount that will be classified as a product cost for May is £15,990. Answer: C.

All of Jill Enterprise's Operations Are Housed in One Building