Question

Identify if the following cost are usually variable, fixed, mixed, or step costs (large steps), step costs (narrow steps)

- Electricity cost, which includes a $15 per month billing charge and an additional amount depending on the number of KW used.

- A computer service agreement in which a company pays $150 per hour of technical time.

-The wages of counter help in a fast food restaurant. -

- The cost of computer printers and copiers in your university.

- The salary costs of guards at a jail. Cost are set as $3600 per month if the number of prisoners is 16 or less. For every 4 additional prisoners, one additional guard must be hired at $1500 per month.

-The salary of dental hygienists in a three-dentist office. One hygienist can take care of 120 cleaning per month.

- Fuel of company's fleet of motor vehicles.

The salary of a receptionist in a law firm.

-The cost of beer for a bar.

- Rent for a dental office.

Answer 1

Fixed Cost:- It refers to the unavoidable cost that would be incurred irrespective of the level of production.

Variable Cost:- It refers to costs that are directly attributable and proportional to the level of production.

Step-variable:- It refers to costs that follow a step-cost behavior with narrow steps(resources must be purchased in small chunks).Step-variable costs can be approximated with a strictly variable cost assumption.

1. Electricity Costs will be considered as Step Costs i.e large steps as the minimum amount is fixed and the increamental cost depends upon the level of usage of electricity.

2.Computer Service Agreement where paymnent is made on per hour basis will be treated as Variable Cost as it depends on the level of usage and can be avoided if required.

3. Wages & salaries shall generally be considered as fixed costs if given on monthly basis. However, any payment based on the work done shall be treated as variable cost.

4.Cost of Computers are sunk and fixed cost. However the cost of copies from printer is a variable cost as it depends on the level of usage i.e. no of. copies.

5.Salary cost shall be treated as step fixed cost (Narrow) as after a certain level, fixed costs will rise to a certain extent and the cycle goes on.

6.The salary of dental hygienists in a three-dentist office is variable cost if the payment is based on the level of output given by dental hygenists. However if the per month payment is fixed, same shall be treated as fixed cost.Also if some portion is fixed and some portion is based on their performance, it shall be considered as Semi Variable or Semi Fixed Costs.

7.Fuel of company's fleet of motor vehicles is a Variable cost as it can be avoided and relates to the level of usage of the car by company.

8.The salary of a receptionist in a law firm is a Fixed Cost and has to be incurred and cant be avoided.

9.The cost of beer for a bar is also a Variable Cost as it directly relates to the level of usage.

10. Rent for a dental office is a Fixed Cost and cant be avoided even if there is no revenue for any period.