Question

Managerial Accounting and Cost Concepts rent equipment for $4,000 per month to produce the new product. Direct laborers will be hired and paid $60 per unit to manufacture the new product. As in prior years, the space in the annex will continue to be depreciated at $8,000 per year. The annual advertising cost for the new product will be $50,000. A supervisor will be hired and paid $3,500 per month to oversee production. Electricity for operating machines will be $1.20 per unit. The cost of shipping the new product to customers will be $9 per unit. To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of $3,000 per year. Required: Using the table shown below, describe each of the costs associated with the new product decision in four ways. In terms of cost classifications for predicting cost behavior (column 1), indicate whether the cost is fixed or variable. With respect to cost classifications for manufacturers (column 2), if the item is a manufacturing cost, indicate whether it is direct materials, direct labor, or manufacturing overhead. If it is a nonmanufacturing cost, then select "none" as your answer. With respect to cost classifications for pre- paring financial statements (column 3), indicate whether the item is a product cost or period cost. Finally, in terms of cost classifications for decision making (column 4), identify any items that are sunk costs or opportunity costs. If you identify an item as an opportunity cost, then select "none" as your answer in columns 1-3. Cost Classifications for: (3) Preparing (1) Predicting Cost Behavior (2) (4) Decision Making Manufacturers Financial Statements Cost Item

cost classifications

Answer 1

Decision Making Name of the Cost Predicting Cost behavior Manufacturers Preparing Financial Statements Rental revenue forgone, $30,000 per year Opportunity Cost None None None Product Direct materials cost, $80 per unit Direct Materials Variable Rental cost of warehouse, $500 per month Fixed Period None Manufacturing Overhead Rental cost of equipment, $4,000 per month Direct labor cost, S60 per unit Fixed Product Variable Direct Labor Product 10 Depreciation of the annex space, $8,000 per year Manufacturing Overhead Product Fixed Sunk Cost 11 Advertising cost, $50,000 per year Fixed Period 12 None Manufacturing Overhead Manufacturing Overhead Supervisor's salary, $3,500 per month Fixed Product 13 Electricity for operating machines will be $1.20 per unit Variable Product 14 Shipping cost, $9 per unit Return earned on investments, $3,000 per year Period 15 Variable None Opportunity Cost 16 None None None 17 18