Mcdonalds Case Study

Answer #1(a)

Managers classify the different costs associated with a product in the following ways:

1. Preparing external financial statements:

(Costs related to the day-to-day operations)

To understand with an example, McDonalds would classify costs as:

Product costs are the costs incurred in manufacturing a burger and remain attached with the burger throughout to point of sale.

• Direct material: All the material costs that are an integral part of a burger or fries, and which can be directly included in calculating total cost of the item McDonalds, are the direct material.

• Direct labour: These are labour expenses incurred in converting the direct material into a finished good, here, a burger.

• Manufacturing overheads: These consist of all manufacturing costs other than direct material and direct labour cost. They include the indirect material and indirect labour (Garrison, Noreen et al. 2012).

Period costs are the non-manufacturing costs. These are:

• Selling costs: All expenses incurred after manufacturing the product to delivering the product to the customer are included in the selling costs.

• Administrative costs: These are expenses incurred in management, directing and controlling of the organisation (Martz A. and Usry M. 1984).

Exhibit 2 gives some examples of the product and period costs of McDonalds and how these costs

Suppose Air New Zealand is scheduled to take off at its scheduled time and a passenger missed a flight. Had the departure been delays, passenger would have made it. Here the variable cost to Air New Zealand for delaying departure to fill that seat would be negligible. Hence, all associated costs here are fixed. But for instance, Air New Zealand plans a new flight from another terminal, majority of its costs would be variable and only fewer would be fixed. Salaries of crew which were fixed in previous case have now become