Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 35

Assigning Cost of Capacity

Beth’s Supplies manufactures building tiles in one plant, which has a practical capacity of 25,000 tiles. The variable cost of the tile is $9.00 per unit, and the fixed costs of the plant are $300,000 annually. Current annual demand is 20,000 tiles. Beth bought the current plant because she expected that demand for the tiles would grow once her reputation was established.

Required

a.What cost per tile should the cost system report?

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b.Given your answer to requirement (a), is there any cost of excess capacity? If yes, what is the cost of excess capacity and how should it be reported? If no, why not?

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c.How would your answers to requirements (a) and (b) change if the smallest tile manufacturing plant that one could build (owing to technology) was able to produce 25,000 tiles?

Step 1 of 5

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.