Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 50

Basic Concepts

For each of the following costs incurred in a manufacturing firm, indicate whether the costs are fixed (F) or variable (V) and whether they are period costs (P) or product costs (M) under full absorption costing.

a. Chief financial officer’s salary.

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b. Depreciation on pollution control equipment in the plant.

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c. Office supplies for the human resources manager.

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d. Power to operate factory equipment.

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e. Commissions paid to sales personnel.

Step 1 of 5

Fixed costs are those costs that are unchanged as volume changes within the relevant range of activity. Fixed costs are always constant irrespective of changes in the level of activity (production).

Variable costs are those costs that changes in direct proportion with a change in volume within the relevant range of activity. Variable costs always changes directly in proportion to the changes in the level of activity (production).

Products costs are those costs assigned to units of production and recognized when the product is sold. Products cost are also called as manufacturing costs.

Period costs include all costs other than product costs which are expensed when they are incurred. Period costs are also called as nonmanufacturing costs.

a.

Chief financial officer’s salary: Chief financial salary is fixed every year and is paid periodically. Hence this cost is fixed cost (F) and period costs (P).