Question

1. The monthly cost of heating our company office is a fixed cost, a CEO says, "because we adjust the thermostat according to the weather conditions which are beyond our control." Do you agree? Is this a variable cost? Explain your ground concisely.

2. At Q company, the annual depreciation expenses for the production equipment are computed under an accelerated depreciation method, resulting in annually changing depreciation amounts. with respect to the production volume, the depreciation amount total level is a ____ cost. Then, explain your ground concisely below.

Answer 1

Answer 1)

The monthly cost of heating the company office is a fixed cost. It is a fixed cost not because it is adjusted based on weather conditions which are beyond human control as stated by CEO. It is a fixed cost because it does not vary with the production volume. Variable costs increase or decrease depending on a company's production volume, they rise as production increases and fall as production decreases. However fixed costs do not vary in line with change in output. They are supposed to be incurred irrespective of the level of production. Fixed costs incur regularly with little fluctuation from period to period. Hence in the said case the cost of heating the company office is a fixed cost as there is no correlation between the said cost and the production level.

Answer 2)

Under accelerated depreciation method, depreciation cost would be a fixed cost. Depreciation cost would be considered as a variable cost only when it is directly proportional to output, for example depreciation based on machine hours operated or number of units produced. However, under accelerated depreciation it is simply two times of straight-line depreciation rate. This is opted to defer the tax payments and shield the income in earlier years. The depreciation would be higher in earlier years and lower in later years even though production is higher in later years. Hence there is no correlation between the depreciation amount and level of output. Therefore, the cost has to be treated as a fixed cost.