Score:
4.
100/100
Points
100
%
Award: 12.50 out of 12.50 points
You received credit for this question in a previous attempt
Exercise 1-14 Cost Classification [LO1-2, LO1-3, LO1-4, LO1-5]
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 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:
Name of the Cost
Predicting
Cost
Behavior
Preparing
Financial
Statements
Manufacturers
Decision Making
Rental revenue forgone, $30,000 per year
None

None

None

Opportunity cost

Direct materials cost, $80 per unit
Variable

Direct materials

Product

None

Rental cost of warehouse, $500 per month
Fixed

None

Period

None

Rental cost of equipment, $4,000 per month
Fixed

Manufacturing overhead

Product

None

Direct labor cost, $60 per unit
Variable

Direct labor

Product

None

Depreciation of the annex space, $8,000 per year
Fixed

Manufacturing overhead

Product

Sunk cost

Advertising cost, $50,000 per year
Fixed

None

Period

None

Supervisor's salary, $3,500 per month
Fixed

Manufacturing overhead

Product

None

Electricity for machines, $1.20 per unit
Variable

Manufacturing overhead

Product

None

Shipping cost, $9 per unit
Variable

None

Period

None

Return earned on investments, $3,000 per year
None

None

None

Opportunity cost

Garrison 16e Rechecks 2017-09-18
rev: 01_19_2019_QC_CS-154146
References
Matching
Learning Objective: 01-02 Identify and give examples of each
of the three basic manufacturing cost categories.
Exercise 1-14 Cost Classification [LO1-2, LO13, LO1-4, LO1-5]
Learning Objective: 01-03 Understand cost classifications
used to prepare financial statements: product costs and period
costs.
Difficulty: 1 Easy
Learning Objective: 01-04 Understand cost classifications
used to predict cost behavior: variable costs, fixed costs, and
mixed costs.
Learning Objective: 01-05 Understand cost classifications used in making decisions: differential costs, sunk costs, and
opportunity costs.
Exercise 1-14 Cost Classification [LO1-2, LO1-3, LO1-4, LO1-5]
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 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:
Name of the Cost
Predicting
Cost
Behavior
Manufacturers
Preparing
Financial
Statements
Decision Making
Rental revenue forgone, $30,000 per year
None
None
None
Opportunity cost
Direct materials cost, $80 per unit
Variable
Direct materials
Product
None
Rental cost of warehouse, $500 per month
Fixed
None
Period
None
Rental cost of equipment, $4,000 per month
Fixed
Manufacturing overhead
Product
None
Direct labor cost, $60 per unit
Variable
Direct labor
Product
None
Depreciation of the annex space, $8,000 per year
Fixed
Manufacturing overhead
Product
Sunk cost
Advertising cost, $50,000 per year
Fixed
None
Period
None
Supervisor's salary, $3,500 per month
Fixed
Manufacturing overhead
Product
None
Electricity for machines, $1.20 per unit
Variable
Manufacturing overhead
Product
None
Shipping cost, $9 per unit
Variable
None
Period
None
Return earned on investments, $3,000 per year
None
None
None
Opportunity cost
Garrison 16e Rechecks 2017-09-18
rev: 01_19_2019_QC_CS-154146
Explanation:
No further explanation details are available for this problem.