P2–6 Cost identificationWollongong Group Ltd of New South Wales, Australia, acquired its factory building about ten years ago. For several years the company has rented out a small annex attached to the rear of the building. The company has received a rental income of £30,000 per year on this space. The renter’s lease will expire soon and, rather than renewing the lease, the company has decided to use the space itself to manufacture a new product.

Direct materials cost for the new product will total £80 per unit. To have a place to sell finished units of product, the company will rent a small warehouse nearby. The rental cost will be £500 per month. In addition, the company must rent equipment for use in producing the new product; the rental cost will be £4,000 per month. Workers will be hired to manufacture the new product, with direct labour cost amounting to £60 per unit. The space in the annex will continue to be depreciated on a straight-line basis, as in prior years. This depreciation is £8,000 per year.

Advertising costs for the new product will total £50,000 per year. A supervisor will be hired to oversee production; her salary will be £1,500 per month. Electricity for operating machines will be £1.20 per unit. Costs 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 about £3,000 per year.

Required Prepare an answer sheet with the following column headings:

List the different costs associated with the new product decision down the extreme left column (under Name of the cost). Then place an X under each heading that helps to describe the type of cost involved. There may be Xs under several column headings for a single cost (for example, a cost may be a fixed cost, a period cost and a sunk cost; you would place an X under each of these column headings opposite the cost).

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Name of Variable Fixed Direct the cost cost Product cost Period Direct Manufacturing (selling and administrative) cost cost materials labour overhead Opportunity Sunk cost cost