Question

Listed here are the total costs associated with the 2017 production of 1,000 drum sets manufactured by TrueBeat. The drum sets sell for $528 each. Costs 1. Plastic for casing—$21,000 2. Wages of assembly workers—$81,000 3. Property taxes on factory—$8,000 4. Accounting staff salaries—$37,000 5. Drum stands (1,000 stands purchased)—$38,000 6. Rent cost of equipment for sales staff—$24,000 7. Upper management salaries—$215,000 8. Annual flat fee for factory maintenance service—$16,000 9. Sales commissions—$13 per unit 10. Machinery depreciation, straight-line—$40,000 Required: 1. Classify each cost and its amount as (a) either variable or fixed and (b) either product or period. (The first cost is completed as an example.)

Answer 1

Answer:

1. Classifying each cost as Variable or Fixed

When total cost changes with change in output then it is variable in nature and when it remains constant then it is fixed cost.

1. Plastic for casing = (a) Variable cost (b) Product as will depend on number of casing. = $21,000 / 1000 units = $21 per casing if casing is per unit done individually.
2. Wages of assembly workers = (a) Variable Costs (b) Period it will depend on number of hours worked, in piece rate system it will depend on number of units, but generally it is based on number of hours so it is period.
3. Property taxes on factory = (a) Fixed Costs (b) Period as this does not depend on number of units produced it is fixed in nature, with time duration.
4. Accounting staff salaries = (a) Fixed Costs (b) Period as this is not related to number of units produced and will be fixed for a month.
5. Drum Stands = (a) Variable cost (b)Product as will be required for each drum individually manufactured.
6. Rent cost of equipment for sales staff = (a) Fixed Cost (b) Period as rented is fixed  for a specified period generally paid monthly and is not based on number of units produced.
7. Upper management salaries = (a) Fixed Cost (b) Period as this is fixed annually and not based on number of units produced.
8. Annual flat fee for factory maintenance service = (a) Fixed Cost (b) Period as this is fixed annually and has no relation with number of units produced.
9. Sales commissions = (a) Variable Costs (b) Product as this is based on number of units sold and defined per unit.
10. Machinery depreciation, straight-line = (a) Fixed Cost (b) Period as this is not based on number of units produced and is fixed annually.