Explore BrainMass

Cost Classifications: Fixed costs, direct materials etc

Several Years ago McCoy's purchased a small building adjacent to it's manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for rental revenue of $40,000 per year. The renter's lease will expire next month, and rater that renewing the lease, McCoy has decided to use the building itself to manufacture a new product.
Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor to oversee production. Her salary will be 2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a ware house nearby in order to store finished units of product. The rental cost will be worth $1,000 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The company will continue to depreciate the building on a straight-line basis, as past years. Depreciation on the building is $10,000 per year.
Advertising cost for the new product will total $50,000 per year. Cost of shipping the new product to customers will be$10 per unit. Electrical cost of operating machines will be$2 per unit.
To have 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 6,000 per year.

Using the column heading below:(PRESENTED IN THE ATTACHMENT)

Classify each cost element, described in the question.


Solution Summary

The attached word document shows illustrates the ways, which costs can be classified.

Costs are an integral part of every organisation and the classifications help the company in determining profitability among other measures.