Question

Exercise 1-14 (Static) Cost Classification (L01-2, LO1-3, L01-4, L01-5) 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 will 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 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 -

Answer 1

Working as follows:

	Cost Classifications for:
Name of the Cost	Predicting Cost Behavior	Manufacturers	Preparing Financial Statements	Decision Making
Rental revenue forgone, $30,000 per year	None	None	None	Opportunity costs
Direct materials cost, $80 per unit	Variable cost	Direct materials	Product cost	None
Rental cost of warehouse, $500 per month	Fixed cost	None	Period cost	None
Rental cost of equipment, $4,000 per month	Fixed cost	Manufacturing overhead	Product cost	None
Direct labor cost, $60 per unit	Variable cost	Direct labor	Product cost	None
Depreciation of the annex space, $8,000 per year	Fixed cost	Manufacturing overhead	Product cost	Sunk Cost
Advertising cost, $50,000 per year	Fixed cost	None	Period cost	None
Supervisor's salary, $3,500 per month	Variable cost	Manufacturing overhead	Product cost	None
Electricity for machines, $1.20 per unit	Fixed cost	Manufacturing overhead	Product cost	None
Shipping cost, $9 per unit	Variable cost	None	Period cost	None
Return earned on investments, $3,000 per year	None	None	None	Opportunity costs