Laco Company acquired its factory building about 20 years ago. For several years, the company has rented out a small, unused part of the building. The renter's lease will expire soon. Rather than renewing the lease, Laco Company is considering using the space itself to manufacture a new product. Under this option, the unused space will continue to be depreciated on a straight-line basis, as in past years. Direct materials and direct labour cost for the new product would be $50 per unit. In order to have a place to store finished units of the new product, the company would have to rent a small warehouse nearby. The rental cost would be $2,000 per month. It would cost the company an additional $4,000 each month to advertise the new product. A new production supervisor would be hired to oversee production of the new product who would be paid $3,000 per month. The company would pay a sales commission of $10 for each unit of product that is sold. Classify each cost by marking an "X" in the box, there can be more than one classification for each cost. Opportunity Cost Sunk Cost Variable Cost Fixed Cost Product Cost Selling & Admin. Cost Differential Cost* Rent on unused factory space Depreciation on the factory space Direct material and direct labour Rental cost of the small warehouse Advertising cost Production supervisor's salary Sales commissions
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Laco Company acquired its factory building about 20 years ago. For several years, the company has rented out a small, unused part of the building. The renter's lease will expire soon. Rather than renewing the lease, Laco Company is considering using the space itself to manufacture a new product. Under this option, the unused space will continue to be
Direct materials and direct labour cost for the new product would be $50 per unit. In order to have a place to store finished units of the new product, the company would have to rent a small warehouse nearby. The rental cost would be $2,000 per month. It would cost the company an additional $4,000 each month to advertise the new product. A new production supervisor would be hired to oversee production of the new product who would be paid $3,000 per month. The company would pay a sales commission of $10 for each unit of product that is sold.
Classify each cost by marking an "X" in the box, there can be more than one classification for each cost.
| Opportunity Cost | Sunk Cost | Variable Cost | Fixed Cost | Product Cost | Selling & Admin. Cost | Differential Cost* | |
| Rent on unused factory space | |||||||
| Depreciation on the factory space | |||||||
| Direct material and direct labour | |||||||
| Rental cost of the small warehouse | |||||||
| Advertising cost | |||||||
| Production supervisor's salary | |||||||
| Sales commissions |
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