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 will total $80 per unit. To have a place to store its finished goods, the company will renta 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 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: Preparing Manufacturers Financial Statements Predicting Cost Behavior Name of the Cost Decision Making 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 arvex 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, 39 per unit Return earned on investments, $3,000 per year

Answer 1

Preparing Predicting cost financial Name of cost behaviour Manufacturers statement 1 Rental revenue forgone, 30000 per year None None None 2 Direct material cost 80 par Variable cost Direct material Product cost 3 Rental cost of warehouse, 500 per month Fixed cost None Period cost 4 Rental cost of equipment, 4000 per month Fixed cost Manufacturing overhead Product cost Direct labor cost, 60 per unit Variable cost Direct material Product cost 6 Depreciation of the annex space 8000 per year Fixed cost Manufacturing overhead Product cost 7 Advertising cost 50000 per year Fixed cost None |Period cost 8 Electricity for machines 1.20 per unit Variable cost Manufacturing overhead Product cost 9 Supervisor's salary 1500 per month Fixed cost Manufacturing overhead Product cost 10 Shipping cost, 9 per unit Variable cost None Period cost 11 Return earned on investments 3000 per year None Decision making Opportunity costs None None None None Sunk cost None None None None Opportunity costs None None