Question

Boca manufactures LX and RX stereo systems in Southern Ontario.

Boca incurs various costs both in producing these stereos and in the operations of the company.

Classify each of the following cost items according to the terms. A cost can be classified under more than one category. If in doubt, select the cost type based on whether the total costs will increase substantially if a large number of stereo systems are produced.

Are these Direct Cost, Indirect Cost, Variable Cost, Fixed Cost, Product Cost and Period Cost

Advertising

Design of LX stereo

Machine Amortization

Office rent

Factory Maintenance

Answer 1

Explanation:

1. Advertising # : Usually remains fixed regardless of units sold, spread over a period time and also not traceable against each unit sold easily, hence an indirect cost. However, rarely it can be related to a particular product (ex: sale of second hand vehicle is done by putting advertisement of the saleable vehicle only). Then it is direct cost in nature
2. Design of LX stereo: Is directly traceable cost, remains fixed per unit and spread over a period of time.
3. Amortization: Is fixed regardless of the units sold, not traceable against each unit. Moreover since its annually apportioned, it is period expenditure in nature.
4. Office Rent: Being a fixed cost by nature, office rent is connected with usage of office floor space, hence an indirect cost. Payment is made periodically, so it is a period cost.
5. Factory Maintenance: Similar to the office rent, Maintenance is a periodic fixed payment made towards factory up-keeping.

	Direct Cost	Indirect Cost	Variable Cost	Fixed Cost	Product Cost	Period Cost
Advertising		Yes#		Yes		Yes
Design of LX stereo	Yes			Yes		Yes
Machine Amortization		Yes		Yes	Yes
Office rent		Yes		Yes		Yes
Factory Maintenance		Yes		Yes		Yes