Question

21. When the activity level is measured by the number of products sold, the Cost of Goods Sold in a "merchandising" company would be considered a:

A. Fixed cost

B. Variable cost

C. Step cost

D. Mixed cost

Side Note: I'm a little confused about this question because I would think that the answer is B, variable cost. However, I'm not sure if since it's a company it might still have fixed costs, therefore making the answer mixed cost.

Answer 1

Fixed Cost: A fixed cost is an expense that does not change as production volume increases or decreases within a relevant range.

Variable Cost:Variable costs are corporate expenses that vary in direct proportion to the quantity of output. Unlike fixed costs, which remain constant regardless of output, variable costs are a direct function of production volume, rising whenever production expands and falling whenever it contracts.

Step Cost: A step cost is a cost that does not change steadily with changes in activity volume, but rather at discrete points.A step cost is a fixed cost within certain boundaries, outside of which it will change.

Mixed Cost:The term mixed costs often refers to the behavior of costs and expenses. Mixed costs consist of a fixed component and a variable component.

Merchandising companies sell products but do not make them. Therefore, these companies will have cost of goods sold but the calculation is much easier than for a manufacturing company. Expenses for a merchandising company must be broken down into product costs (cost of goods sold) and period costs (selling and administrative).

Cost of Goods Sold = Opening Inentory+Purchases-Closing Inventory

Therefore for Mercandaise companies cost of goods sold is considered a variable cost.in remaining 3 costs fixed cost portion is included so those are not treated as cost of goods sold in mercandaise companies.