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 Direct materials cost for the new product wil total $80 per unit. To have a place to store its finished goods, the company will rent a 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 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 wil be 59 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), 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 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 Os Behavior Preparing Financial Statement Manufacturers Decision Making Name of the Cost Rental revenue forgone, $30,000 per year Direct materials cost, $80 per unit Rental cost of warehouse, $500 per montl Rental cost of equipment, $4,000 per month Direct labor cost, 560 per unit Depreciation of the annex space, $8,000 per year Advertising cost $50,000 per year Supervisor's salary, $3,500 per month Electricity for machines, $1.20 per unit Shipping cost. $9 per unit Return earned on investments. $3,000 per vear

Answer 1

Name of cost Cost behavior Manufacturers Financial statement Decision making

Rental revenue   None None None Opportunity cost

Direct material Variable Direct material   Product cost Sunk cost

Warehouse rent Fixed cost   None Period cost   Sunk cost

Equipment rent Fixed cost None Period cost Sunk cost

Labour cost Variable cost   Direct labour Product cost Sunk cost

Depreciation Fixed cost Manufacturing OH Period cost Sunk cost

Advertising cost Fixed cost None   Period cost Sunk cost

Supervision salary Fixed cost Manufacturing OH Period cost Sunk cost

Electricity Variable cost Manufacturing OH Product cost   Sunk cost

Shipping cost Variable cost None Product cost Sunk cost

Return on investment None None None   Opportunity

*OH = Overhead

Variable cost = cost that vary with the change in output

Fixed cost = cost which remains same.Do not change with respect to change in output.

Product cost= cost which is related to produce unit

Period cost = Cost which is related to period .It can be weekly,quarterly,monthly or yearly.

Opportunity cost = Loss of income of one alternative by accepting other alternative

Sunk cost = which is not considered in decision making