Question

1.- Wazy Corporation's relevant range of activity is 5,000 units to 15,000 units. When it produces and sells 1,000 units, its average costs per unit are as follows:

	Average Cost per Unit
Direct materials	$	7.00
Direct labor	$	4.00
Variable manufacturing overhead	$	3.00
Fixed manufacturing overhead	$	3.50
Fixed selling expense	$	1.10
Fixed administrative expense	$	0.80
Sales commissions	$	1.00
Variable administrative expense	$	1.00

If 1,000 units are sold, the variable cost per unit sold is closest to:

2. Describe Fixed Cost behavior (per unit and in total) and give your own example.

3. Describe Variable Cost behavior (per unit and in total) and give your own example.

4. Define Period Cost, describe how/when they are expensed AND give your own example.

Answer 1

Answer 1

Answer 2

Fixed costs refer to costs which do not vary with change in output (within a specified range). While they remain the same on a total basis, they decrease in per unit costs with increase in the number of units sold, due to their fixed absolute amounts.

Example: Depreciation costs

Answer 3

Variable costs refer to costs that vary with change in output levels. While they remain fixed on a per unit basis, they vary on a total basis, with increase in total cost with increase in units sold.

Example: Raw material cost for production

Answer 4

Period costs refer to costs that cannot be ordinarily allocated to any asset or inventory for the purposes of capitalisation and reflection on the Balance Sheet. These costs are necessarily expensed off in the Income Statement in the year in which they are actually incurred, in accordance with the general accounting principles. They generally relate to facilitation of main business operations and do not generally depend on the production levels.

Examples: Rent expenses, marketing expenses, corporate office salaries, etc.

In case of any questions or clarifications on the above workings, please share the same in the comments section.

All the best!