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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.

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.

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 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

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Solution Preview

Q1: The most appropriate cost object is a dance studio. The McPhair Dance Studios should evaluate the profitability of each studio and see which ones are making profits and which one's are making losses. Then we can compare the function of profitable ones with the loss making ones to identify the reasons for failure.

Q2: ...

Solution Summary

The solution looks at classification of costs for Fran McPhair's Dance Studios.