Question

Cherry Corporation, a manufacturing company, is analyzing its cost structure in a project to achieve some cost savings. Which of the following statements is/are correct?

I. The cost of the direct materials in Cherry’s products is considered a variable cost.

II. The cost of the depreciation of Cherry’s plant machinery is considered a fixed cost. Cherry uses an accelerated depreciation method.

III. The cost of electricity for Cherry’s manufacturing facility is considered a variable cost, even if the cost of the electricity has both variable and fixed components.

Group of answer choices

Answer 1

I and II are correct Variable costs are the costs that are in direct relation to the production. That is, they increase or decrease in the same direction as the output produced. 1. Direct materials satisfies the definition above. Hence it's a variable cost. 2. Costs that do not change with the output changes are called fixed costs. Depreciation does not depend on production level. Hence fixed costs 3. Costs that exhibit the features of both variable and fixed costs are called mixed costs. Hence electricity has to be considered mixed cost