Question

Complete the table below to describe each cost behavior as either fixed (F) or variable (V) and the type of cost as either product cost (product) or period cost (period). Cost Behavior Type of Cost F for fixed or Product or V for variable Period (1) Depreciation on manufacturing equipment Blank 1 Blank 2 (2) Wages paid to employee involved in production Blank 3 Blank 4 (3) Salary paid to administrative assistant for company president Blank 5 Blank 6 (4) Electricity used in the production facility Blank 7 Blank 8

Answer 1

Fixed costs are the costs that do not change within the relevant range of production. The total fixed cost does not change with change in production. The fixed cost per unit decreases as production increases and vice-versa.
Variable costs are incurred when a product is made. The variable cost per unit remains the same whereas the total variable cost increases as production increases.
Product cost ( Inventoriable costs) are the costs which can be directly traced to the products, without which the products cannot be made. eg- Direct material, direct labour, manufacturing overheads.
Period costs are nonmanufacturing overheads. They are costs for activities other than production and are expensed as they are incurred. eg - selling expenses, general & administrative expenses.

Accordingly, we can describe the costs as follows -

1. Depreciation on manufacturing equipment : Product cost , Fixed cost
2. Wages paid to employee involved in production : Product cost , Fixed cost
3. Salary paid to administrative assistant for company president : Period cost , Fixed cost
4. Electricity used in the production facility : Product cost , Fixed cost

NOTE : Electricity is a semi-variable cost. There is a basic fixed amount that must be paid regardless of activity and above that is an amount that varies with activity. But since we have to classify it as either fixed or variable, we are describing it as a fixed cost.