Question

Classify each of the following items of factory overhead as either a fixed or a variable cost. (Include any costs that you consider to be semi-variable within the variable category. Remember that variable costs change in total as the volume of production changes.)

Janitor’s wages

Rent

Labor for machine repairs

Vacation pay

Employer’s payroll taxes

Insurance on building

Indirect Labor

Overtime premium pay

Indirect materials

Machine lubricants

Plant manager’s salary

Factory electricity

Depreciation on building (straight line method)

Depreciation on machinery (units-of-production method)

Small tools

Answer 1

Cost Elements:	Type of Cost	Explanation
Janitor’s wages	Fixed Cost	Janitor is for Caretaking and cleaning and is not involved in Producion Hence Fixed
Rent	Fixed Cost	Rent is not related to Production, Thus is a fixed Cost
Labor for machine repairs	Variable Cost	Machine Repairs required increases with increase in Production
Vacation pay	Variable Cost	Vacation Pay is Based on regular rate of earning of an Empoyee, which inturn based on Production
Employer’s payroll taxes	Variable Cost	Employers Payroll is Based on regular rate of earning of an Empoyee, which inturn based on Production
Insurance on building	Fixed Cost	Whatever is the Production is, Insurance will remain same
Indirect Labor	Variable Cost	Indirect Labor includes salary of foreman, Supervisior etc which may include variable component in the form of Incentives
Overtime premium pay	Variable Cost	If Production is Huge, OT is Paid
Indirect materials	Variable Cost	Material Qty vary with Production
Machine lubricants	Variable Cost	Use of Lubricant varies with Production
Plant manager’s salary	Fixed Cost	Plant Manager is paid a fixed salary because he is not involve in Production
Factory electricity	Semi Variable Cost	It has Fixed Component Plus a variable rate basis the Units of Use
Depreciation on building (straight line method)	Fixed Cost	Depreciation under straight line remains same
Depreciation on machinery (units-of-production method)	Variable Cost	Depreciation in this varies with Production Volume
Small tools	Variable Cost	Varies with Production volume