Question

Homework 0 Saved Help Classify each cost as being either variable or fixed with respect to the number of units produced and sold. Also classify each cost as either a period or a product cost. Preparing Financial Statements Predicting Cost Cost Item Behavior 1. Hamburger buns in a Wendy's restaurant. 2. Advertising by a dental office. 3. Apples processed and canned by Del Monte. 4. Shipping canned apples from a Del Monte plant to customers. 5. Insurance on a Bausch & Lomb factory producing contact lenses. 6. Insurance on IBM's corporate headquarters. Salary of a supervisor overseeing production of printers at Hewlett- Packard. 8. Commissions paid to automobile salespersons. 9. Depreciation of factory lunchroom facilities at a General Electric plant. 10. Steering wheels installed in BMWS.

Answer 1

Cost of a product may rise, fall or remain constant when there is a change in activity level and it is referred to as cost behavior and it can be classified variable, fixed and mixed cost. Total variable cost increases in direct proportion to activity level changes. Fixed costs on the other hand remain constant in total irrespective of the changes in the activity level. Costs are classified as product or period costs for purpose of financial statement preparation. Product costs also known as inventoriable costs include all costs incurred in manufacturing a product or acquiring it like raw material, direct labor, manufacturing overhead etc. All other costs except product costs are known as period costs like selling and general and administrative expenses.

1. The cost of hamburger buns is a variable product cost because total cost of buns increases as the company sells more hamburgers.
2. Advertising is a fixed period cost because cost of advertising is expensed as selling expense in the period incurred.
3. The cost of processed and canned apples is a variable product cost because total cost of apples processed increases as the company processes more apples.
4. Shipping cost of canned apples is a variable period cost because total shipping cost increases when the number of shipments increase but shipping costs are expensed in the period in which they are incurred as a part of selling expenses
5. Factory insurance is a fixed product cost because total cost remains constant and it is an inventoriable cost as manufacturing overhead.
6. Corporate headquarters insurance is a fixed period cost because total cost remains constant and it is expensed as incurred.
7. Production supervisor salary is a fixed product cost because total cost remains constant and it is an inventoriable cost as manufacturing overhead.
8. Commission to salespersons is a variable period cost because total shipping cost increases when the sales volume increase but it is expensed as incurred.
9. Factory depreciation is a fixed product cost because total cost remains constant and it is an inventoriable cost as manufacturing overhead.
10. Cost of steering wheels is a variable product cost because total cost of steering wheels increases as the company manufactures more automobiles.