Question

Identifying Fixed, Variable, Mixed, and Step Costs

Consider each of the following independent situations:

Required:

1. For each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost. (Hint: First, consider what the driver or output measure is. If additional assumptions are necessary to support your cost type decision, be sure to write them down.)

Example: Raw materials used in production - Variable cost

a. A computer service agreement in which a company pays $150 per month and $15 per hour of technical time.
b. Fuel cost of the company's fleet of motor vehicles.
c. The cost of beer for a bar.
d. The cost of computer printers and copiers at your college.
e. Rent for a dental office.
f. The salary of a receptionist in a law firm.
g. The wages of counter help in a fast-food restaurant. (Assume that the counter help can be called in or sent home as the need arises.)
h. The salaries of dental hygienists in a three-dentist office. One hygienist can take care of 120 cleanings per month.
i. Electricity cost which includes a $15 per month billing charge and an additional amount depending on the number of kilowatt-hours used.

Answer 1

Based on the information available in the question, the costs can be classified as follows:-

a. A computer service agreement in which a company pays $150 per month and $15 per hour of technical time - Mixed costs as it includes both a fixed portion and a variable portion.

b. Fuel cost of the company's fleet of motor vehicles. - Variable cost as it varies depends on the usage.

c.The cost of beer for a bar. - Variable cost as it changes with the number of units

d. The cost of computer printers and copiers at your college. - Step cost as it does not change with direct levels of activity.

e. Rent for a dental office. - Fixed cost as it does not change period over period

f. The salary of a receptionist in a law firm. - Fixed cost as it does not change period over period.

g. The wages of counter help in a fast-food restaurant. (Assume that the counter help can be called in or sent home as the need arises.) - Variable cost as it changes with the requirements or the needs.

h.) The salaries of dental hygienists in a three-dentist office. One hygienist can take care of 120 cleanings per month - Step cost as it does not change upto a level of activity.

i. Electricity cost which includes a $15 per month billing charge and an additional amount depending on the number of kilowatt-hours used - Mixed cost as it includes both variable and fixed elements

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