Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 43

Classification of Costs Fran McPhair Dance Studios is a chain of 45 wholly owned dance studios that offer private lessons in ballroom dancing. The studios are located in various cities throughout the southern and southeastern states. McPhair offers a set of 12 private lessons; students may pay for the lessons one at a time, but each student is required to enroll for at least a 12-lesson plan. The 20-,40-, and 100-lesson plans offer savings. Each dance instructor is paid a small salary plus a commission based on the number of dance lessons provided.

Required

1. McPhair’s owner is interested in a strategic analysis of the business. The owner wants to understand why overall profitability has declined slightly in the most recent year while other studios in the area seem to be doing well. What is the proper cost object to begin this analysis? Explain your choice.

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2. For each of the cost elements determine the cost classification from the following list for the cost object you chose in requirement 1. (In some cases, two or more classifications may apply.)

Cost Elements

1. Each dancing instructor’s salary.

2. Manager’s salary.

3. Music tapes used in instruction.

4. Utilities for the studio.

5. Part-time studio receptionist.

6. Planning and development materials sent from the home office.

7. Free lessons given by each studio as a promotion.

8. Regional TV and radio advertisements placed several times a year.

Cost Classifications

a. Direct

b. Indirect

c. Variable

d. Fixed

e. Controllable by studio manager

f. Uncontrollable by studio manager

Step 1 of 3

Fixed costs are those costs which does not changes with change in level of production. Variable costs are those costs which changes with change in level of production. Direct costs are those costs which can be clearly related to certain good or activity. Indirect costs are those costs which cannot be clearly related to certain good or activity. Cost is expense of resource which happens when the resource is used.