Question

1. The classification of fixed, variable, and semivariable costs A Aa Complete the following sentences by inserting the correct terms Over the short run, operating costs that vary directiy with sales are called long run, all costs are costs. However, over the Consider the cost structure of Wellington Industries: Review the traditional format income statement for Wellington Industries that follows, and dassify the indicated costs as being fixed, semivariable, or variable in nature. Fixed Cost Semivariable Cost Variable Cost $7,546,235 2,414,7950 2,112,946 00 00 00 00 Wellington Industries Income Statement for the Year Ending June 30 Net sales Cost of goods sold Direct materials Direct labor Overhead expenses: Depreciation on manufacturing equipment Water utility expense Total cost of goods sold Gross profit Operating expenses: Sales commission expense Lease for factory space Total operating expenses Eamings before interest and taxes (EBIT) Interest expense Earings before taxes (EBT) Taxes (35%) Net income Preferred stock dividends Earnings available to common shareholders 301,849 150,925 4,980,515 2,565,720 226,3870 528 236 754,623 1,811,097 52.774 1,358,323 475,413 0 00 00 0 00 00 000 00 S882 910 196 202 $686.708

Answer 1

Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Semi variable costs are also called as mixed costs which would remain the same in total upto a volume of production or sale and then start varying along with volume of production or sale. In other words, these costs are partially fixed and partially variable in nature. Therefore, over the short-run operating costs that vary directly with sales are called VARIABLE costs. However, over the long-run all costs are FIXED.

Fixed cost Semi- variable cost Variable cost Yes Yes [Vary directly with volume of production] [Vary directly with volume of production) [Doesn't vary with volume of production) [Vary partially with volume of production] Yes Direct materials Direct labor Mfg. overhead expenses: Depreciation on mfg. equipment Water utility expense Operating expenses: Sales commission expense Lease for factory space Interest expense Taxes Preferred stock dividends D in [Vary partially with volume of sales] [Doesn't vary with volume of production] [Doesn't vary with volume of production] [Vary directly with volume of sales] [Doesn't vary with volume of production] Yes