Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 52

Classification of Costs

Speedy Auto Service provides oil changes and minor repairs from 12 different locations in Wadesborough, Pennsylvania. The technicians who replace the oil and parts (mostly windshield wipers, air filters, and the like) are paid for an eight-hour day, irrespective of the number of customers in a give day. The cost object for Speedy is each customer visit. The cost elements for Speedy include:

1. Technicians who change the oil and replace parts.

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2. Parts.

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3. Oil.

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4. Supplies, rags, cleanup equipment.

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5. Tools.

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6. Rental of each location.

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7. Advertising.

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8. Utilities.

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9. Licenses and fees.

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10. Employee training; 10 hours at time of hiring and 2 hours per month thereafter.

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11. Security service to watch the locations during closing hours.

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12. Online software system for managing sales, costs, and financial reports including tax returns and employee payroll.

Required

1. For each cost item, indicate whether it is fixed or variable relative to the cost object.

2. For each cost item, indicate whether it is a product or a period cost.

Step 1 of 3

Fixed costs are those costs which does not changes with change in level of production. Variable costs are those costs which changes with change in level of production. Product costs are those cost used in complete the production. Period costs are those cost which are not used in production of good.