Question

Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building 10 years ago. For several years, the company has rented out a small annex attached to the rear of the building for $30,000 per year. The renter's lease will expire soon, and rather than renewing the lease, the company has decided to use the annex to manufacture a new product. to use the an Direct materials Direct materials cost for the new product will total $80 per unit. To have a place to store its finished goods, the company will rental small warehouse for $500 per month. In addition, the company must 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. aborers will be hit 58.000 per year. ervisor will be hire 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 $120 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 2), indicate whether the cost is fixed or variable. With respect to cost classifications for manufacturers (column 3), 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 preparing financial statements (column 4), indicate whether the item is a product cost or period cost. Finally, in terms of cost classifications for decision making (column 5). 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 2-4 Cost Classifications for: Predicting Preparing Name of the Cost Manufacturers Financial Decision Making Behavior Statements Rental revenue forgone. $30.000 per year Direct materials cost. $80 per unit Rental cost of warehouse $500 per month Rental cost of equipment. $4,000 per month Direct labor cost, $60 per unit Depreciation of the annex space. $8,000 per year Advertising cost, $50,000 per year Supervisor's salary, 53,500 per month Electricity for machines, $1.20 per unit Shipping cost. $9 per unit Retur earned on investments, $3,000 per year

Answer 1

					2)	3)		4)		5)
					Predicting	Manufacturers		Preparing		Decision making
Name of the cost					cost			Financial
					Behaviour			statements
Rental revenue forgone,$30,000 per year					Noe	None		None		opportunity cost
Direct materials cost $80 per unit					Variable	Direct materials		Product cost
Rental cost of warehouse,$500 per month					Fixed	None		period cost
Rental cost of equipment,$4,000 per month					Fixed	MOH		Product cost
Direct labor cost,$60 per unit					Variable	Direct labor		Product cost
Depreciation of the annex space ,$8000 per year					Fixed	MOH		Product cost		Sunk cost
Advertising cost,$50,000 per year					Fixed			period cost
Supervisor's salary ,$3,500 per month					Fixed	MOH		Product cost
Electricity for machines ,$1.20 per unit					VAriable	MOH		Product cost
Shipping cost ,$9 per unit					Variable			period cost
Return earned on investments ,$3,000 per year					None	None		None		opportunity cost