Question

Classify each of Georgia-Pacific’s costs below as either an inventoriable product cost (direct or indirect) or a period cost (selling or administrative) and also as either a variable or a fixed cost. You should have two check marks (or “X”s) for each listed cost below. As an example, the first one in the list has been completed for you. Note that each item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either a period cost (selling or administrative cost) or a product cost (direct or indirect with respect to a unit of production)

*Variable *Fixed *selling cost *direct *indirect

Example: Cost of TV ads promoting environmental awareness. X X

1. Purchase of lumber to be cut into boards

2. Lease payment on the administrative headquarters

3. Salaries of scientists in Georgia-Pacific’s Research & Development Division studying ways to speed forest growth.

4. Cost of new software to track inventory during production

5. Salaries of Georgia-Pacific’s top executives

6. Life insurance for the CEO

7. Cost of chemical applied to all lumber produced to inhibit mold from developing

8. Depreciation on the equipment used to manufacture gypsum boards in the building materials manufacturing plant

9. Wages and benefits paid to assembly-line workers in the paper manufacturing plant

10. Salaries paid to quality control inspectors in the building materials manufacturing plant

11. Repairs and maintenance on factory equipment in the paper manufacturing plant

12. Commissions paid to Georgia-Pacific sales and marketing staff

Answer 1

Product cost are costs associated with manufacturing process and those manufacturing cost vary with output are direct costs and they are variable in nature whereas the costs that do not vary with output are indirect costs and they are fixed in nature.

Period costs are costs associated with selling and administration process. Generally selling expenses are variable in nature whereas administrative expenses are fixed in nature.

	Product Cost		Period cost		Variable	fixed
	Direct	Indirect	Selling	administrative
1.	X				X
2.				X		X
3.				X		X
4.		X				X
5.				X		X
6.				X		X
7.	X				X
8.		X				X
9.	X				X
10.		X				X
11.		X				X
12.			X		X