Question

The following are different categories of costs: Variable, Fixed (committed), Fixed (discretionary), and Mixed.

Identify what type of cost is best represented by the following examples of costs and briefly explain why.

The answer to the first one, Rent, is provided as an example: Rent is a fixed, committed cost because it does not change due to differences in activity levels. In other words, rent is always a cost that will be due regardless of business activity level. It is generally considered a committed cost because once you sign the lease you are committed to pay rent for the life of the lease.

Rent: Answer explained above

Property taxes on land and building

Billboard advertising campaign

Raw materials used in the manufacturing process

Employee picnic with band, food, and door prizes

Answer 1

Property taxes on land and building:

This is Fixed (Committed) cost. This cost is fixed irrespective of activity level. This is a statutory expense without any discretion

Billboard advertising campaign:

This is a Fixed (discretionary) cost. This cost does not vary with activity level. It is discretion of the company whether to incur this cost. There is no commitment to incur this cost. There is also no legal or statutory requirement for this cost

Raw materials used in the manufacturing process:

This is Variable Cost . Raw material cost is a direct cost which varies directly with the level of output.

Employee picnic with band, food, and door prizes:

This is a Fixed (discretionary) cost. This cost does not vary with activity level. It is discretion of the company whether to incur this cost. There is no commitment to incur this cost. There is also no legal or statutory requirement for this cost