Question

Cost Concepts and Classifications
Jamal has a garage that was constructed at a cost of $8,000 several years ago. Jamal decided to produce and sell surfboards in his spare time. Accordingly he can use the garage for construction purposes. The garage will be depreciated over a 20-year life. Jamal has determined that each surfboard will require $60 in wood. He will hire students to do most of the work and pay them $70 for each surfboard completed. He will rent tools at a cost of $400 per month. Jamal has drawn money out of savings to provide the capital needed to get the operation going. The savings were earning interest at 6 percent annually. An advertising agency will handle advertising at a cost of $200 per month. Jamal will hire students to sell the surfboard and pay a commission of $40 per board.

Required:
From the foregoing information/above text, identify all the examples you can of the following types of costs (a single item may be identified as more than one type of cost)-use a table:

Cost Item   Your Answer
Variable cost ( 4 marks)  
Fixed cost ( 4 marks)  
Selling or administrative cost ( 4 marks)  
Product cost ( 4 marks)  
Manufacturing overhead cost ( 4 marks)  
Sunk cost ( 4 marks)  
Opportunity cost ( 4 marks)  
Differential cost (between the alternatives of producing or not producing surfboard) ( 2 marks)  

Answer 1

	COST ITEM	CLASSIFICATION
1]	Book value of garage	Sunk Cost
2]	Depreciation of garage	Product cost, Fixed cost, MOH
3]	Surfboard	Product cost, Variable cost
4]	Amount payable to students hired	Product cost, Variable cost
5]	Rent of tools	Product cost, Fixed cost, MOH
6]	Earnings lost on savings	Opportunity cost, Fixed Cost, Differential cost
7]	Advertising cost	Selling and administrative cost, fixed cost
8]	Commission	Selling and administrative cost, Variable cost