Question

Q) Pepsi Cola Company wants to estimate the cost for each process. It is a beverage manufacturing unit and only produce different flavors of beverages.

Required:

a. Classify each of the following costs as either direct or indirect with respect to production process.

b. Classify each of the following costs as either fixed or variable with respect to Pepsi Cola Company per day.

	Direct	Indirect	Fixed	Variable
Admin & Security
Tools & Accessaries
Employee Wages
Employees Transportation
Plant & Machinery

Answer 1

SOLUTION :

	Direct	Indirect	Fixed	Variable
Admin & Security		Yes	Yes
Tools & Accessories	Yes			Yes
Employee Wages	Yes			Yes
Employee Transportation		Yes	Yes
Plant & Machinery	Yes		Yes

NOTE :

Direct Costs - Those costs which can be directly related with a product produced or service rendered. Usually, plant assets are considered indirect. But here, there is only one product and it is ASSUMED that the cost of machinery can be easily charged to each unit produced. Other examples are Materials, Labour & Factory Overhead.   

Indirect Costs - Those costs which can not be directly related with a product produced or service rendered. Ex : Administrative Salary, Printing & Stationery.

Fixed Cost - Those costs which do not vary with change in volume of production. Ex : Factory Rent, Salary to CFO.

Variable Cost - Those costs which vary with change in volume of production. Ex : Piece rate wages, materials consumed.