Question

Marv's Furniture and Fixtures produces seats for movie theaters. Listed below are selected cost items for the seat production. Classify each cost as either fixed or variable, and either a product or a period cost:
1. Fabric for seats.
2. Assembly labor.
3. Factory property taxes.
4. Accounting staff salaries.
5. Sales office rent.
6. Sales manager's salary.
7. Depreciation on factory equipment.
8. Sales commissions.

Answer 1

Answer:

Fixed cost is the one which remains fixed and doesn't changes within a range of level of activity changes which includes Factory property taxes (doesn't changes with furniture manufacturing), accounting staff salaries (doesn't changes with furniture manufacturing), sales office rent (doesn't changes with furniture manufacturing), Sales manager salary and Depreciation on factory equipment.

On the other hand, the variable cost changes with the change in the level of activity and this includes fabric for seats (greater usage for greater amount of seats), assembly labor and sales commissions paid.

Period cost is the cost that is associated with the passage of time and increases with the passage of time and is not dependent on level of activity.

This includes Factory property taxes, accounting staff salaries, sales office rent, Sales manager salary and Depreciation on factory equipment.

Product cost is the cost that is associated with costs that are directly linked with manufacturing of the product. This includes all the variable overheads, specific fixed cost and variable costs. The examples include Fabric for seats and Assembly labor.