Question

Problem 2-42 Cost Terminology (LO 2-2, 2-5, 2-10)

[The following information applies to the questions displayed below.]

The following cost data for the year just ended pertain to Sentiments, Inc., a greeting card manufacturer:

Direct material	$	2,200,000
Advertising expense		98,000
Depreciation on factory building		115,000
Direct labor: wages		550,000
Cost of finished goods inventory at year-end		115,000
Indirect labor: wages		142,000
Production supervisor’s salary		47,000
Service department costs*		100,000
Direct labor: fringe benefits		117,000
Indirect labor: fringe benefits		30,000
Fringe benefits for production supervisor		10,000
Total overtime premiums paid		55,000
Cost of idle time: production employees§		40,000
Administrative costs		150,000
Rental of office space for sales personnel†		15,000
Sales commissions		5,000
Product promotion costs		10,000

*All services are provided to manufacturing departments.

§Cost of idle time is an overhead item; it is not included in the direct-labor wages given above.

†The rental of sales space was made necessary when the sales offices were converted to storage space for raw material.

Problem 2-42 Part 2

2. One of the costs listed below is an opportunity cost. Identify this cost.

Multiple Choice Rental of office space for sales personnel Product promotion costs Direct labor: fringe benefits Administrative costs Sales commissions Cost of finished-goods inventory at year-end

Answer 1

Answer is option A - rental of office space for sales personnel.

Opportunity cost refers to the cost which is incurred because of a specific event which would not be incurred otherwise. So if we don't have to store closing inventory then we could have used that space for sales personnel. But because we are using that space , we have to incur this cost.

It is like cost of second best alternative.

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