COST TERMS AND CONCEPTS ANSWER BOTH QUESTIONS 1 & 2a-d 1. Classify each of the following costs as either period costs or product costs. Also indicate whether each cost is fixed or variable with respect to changes in the amount of output produced and sold. Period Cost Product Cost Variable Cost Fixed Cost Example: Rent on a sales office X X Example: Direct materials X X a. Sales commissions .. b. Rent on a factory building ..... c. Headquarters secretarial salaries d. Assembly line workers e. Product advertising f. Cherries in a cannery g. Top management salaries h. Lubricants for machines ... i. Shipping costs via express service j. Executive training program . k. Factory supervisory salaries 2. SMALL BUSINESS START UP PROBLEM: Hany is considering whether to produce and sell classic wooden surfboards in his spare time. His garage was constructed at a cost of $22,000 several years ago and could be used for production purposes. The garage would be depreciated over a 20-year life with a 10% residual value. Hany has determined that each surfboard will require $30 worth of wood. He would hire students to do most of the work and would pay them $35 for each surfboard completed. He anticipates a 5% failure rate (5 of each 100 boards would be discarded.) He would rent tools at a cost of $400 per month. Hany can draw money out of savings to provide the capital needed to get the operation going. The savings are earning interest at 6% annually. An ad agency would handle advertising at a cost of $500 per month. Hany would hire students to sell the surfboards and pay a commission of $20 per board. Required: a. Assume the garage is new. The garage depreciation per year would = $ b. Direct cost to make each surfboard would require which of the cost elements? c. Why is savings an expense since he isnt borrowing the money? d. From the foregoing cost information, identify all the examples you can of the following types of costs (a single item may be identified as many types of costs). A cost should be classified as variable in this case if it is variable with respect to the number of surfboards produced and sold. A cost should be classified as a differential cost if it differs between the alternatives of producing or not producing the surfboards. Place an X in the right boxes. Variable Costs Fixed Costs Selling & Admin. Costs Product Costs Manufacturing Overhead Costs Sunk Costs Differential Costs Opportunity Cost Original cost of garage Depreciation on the garage Wood for each surfboard Student workers Tool rental Interest on savings Advertising costs Sales commissions