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ACC 928 Lecture Notes - Lecture 2: Cost Estimate, Fixed Cost, Variable Cost

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whitegiraffe51
10 Aug 2016
School
McMaster University
Department
Accounting
Course
ACC 928
Professor
Aadil Merali Juma

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Document Summary

Cost v. s expense you go buy a phone and it will last you for 3 years this will be. Expense is what you incurred, and is needed to generate revenue. When inventory is being sold it will be cost and it will convert to cost of good sold. Building is a cost the conversion for this is amortization expense. A cost is a sacrifice you make to generate revenue in the future. A cost is an asset and it goes in the balance sheet. A cost is the value of economic resources (e. g. , money) sacrificed or used up to achieve a particular objective (e. g. , produce a product or perform a service). Following are some examples of costs that may be incurred by a business organization: on jan. 1, 2007 abc co. purchased a machine for ,000 to be used in producing a certain product x .

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Related Questions

Onslow Co. purchases a used machine for $178,000 cash on January 2 and readies it for use the next day at a $2,840 cost. On January 3, it is installed on a required operating platform costing $1,160, and it is further readied for operations. The company predicts the machine will be used for six years and have a $14,000 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of.

Prepare journal entries to record the machine’s purchase and the costs to ready and install it. Cash is paid for all costs incurred.

1. Record the purchase of a used machine for $178,000 cash.

2. Record the costs of $2,840 incurred on the used machine.

3. Record the cost of $1,160 for an operating platform.

RIGO CORPORATION

Consider each part independently.

Part One

The RIGO Meat Corporation is considering whether it should replace an old machine. The new machine will produce 25% more units than the old machine in the same amount of time. The purchase of the new machine will cause fixed selling costs to increase, but variable selling costs will not be affected. The new machine will require installation by a specialty engineering firm. If the new machine is purchased, the old machine can be sold for a residual value. The old machine requires frequent maintenance to keep it running. The new machine will require maintenance only once per year. The new machine will be paid by cash.

REQUIRED:

For each of the following costs, indicate whether the cost is a differential (incremental) cost, a sunk (irrelevant) cost, or neither. Explain each of your answers.

1. Cost of new machine

2. Cost of old machine

3. Fixed selling costs

4. Variable selling costs

5. Maintenance cost of new machine

6. Maintenance costs of old machine

Part Two

The RIGO Corporation currently makes two types of chairs, Alpha and Beta. The company now has an opportunity to make a third chair, Gamma. In doing so, it will forgo some of the Beta. Very briefly explain what is an opportunity cost in this example.

Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year. Option One -- Acquire a New Finishing Machine The cost of the machine is $1,000,000, and it will have a useful life of 5 years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for 5 years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on its current fully depreciated finishing machine. Option Two -- Outsource the Finishing Work Verla can outsource the work to LM, Inc., at a cost of $200,000 per year for 5 years. If it outsources, Verla will scrap its current fully depreciated finishing machine. Verla’s effective income tax rate is 40%. The weighted-average cost of capital is 10%. The firm’s net present value of acquiring the new finishing machine is A. $229,710 net cash outflow. B. $267,620 net cash outflow. C. $369,260 net cash outflow. D. $434,424 net cash outflow.