Question

E22-1.  

Define and classify variable, fixed, and mixed costs.

(LO 1)

Bonita Company manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for two levels of production.

	Costs Incurred
Production in Units	5,000		10,000
Production Costs	Total Cost	Cost/Unit	Total Cost	Cost/Unit
Direct materials	$8,000	$1.60	$16,000	$1.60
Direct labor	?9,500	?1.90	?19,000	?1.90
Utilities	?2,000	?0.40	??3,300	?0.33
Rent	?4,000	?0.80	??4,000	?0.40
Maintenance	???800	?0.16	??1,400	?0.14
Supervisory salaries	?1,000	?0.20	??1,000	?0.10

Instructions

(a)  

Define the terms variable costs, fixed costs, and mixed costs.

(b)  

Classify each cost above as either variable, fixed, or mixed.

Answer 1

(A)	Variable Cost
	It refers to the itme of cost which increases in the sale proportion as outpot increases
	Fixed Cost
	It refers to the cost which remains fixedirrepective to the output produced. Eg : rent of machinery,
	Mixed Cost
	Mixed Cost is mixed of both the cost i.e., fixed and variable cost
(b)	Expense	Type of cost
	Direct Material	Variable
	Direct Labour	Variable
	Utilities	Mixed
	Rent	Fixed
	Maintenance	Mixed
	Supervisor Salary	Fixed