Quiz 8: Cost Concepts Relevant to Decision Making
Product cost is the cost used to create a product. These include labor cost, raw material cost, factory overhead etc. A period cost is a cost that cannot be capitalized into inventory or fixed assets. 1. Storage and material handling costs for raw materials is product cost as it includes material cost. Therefore, it comes under Product Cost. 2. Gains or loss on disposal of factory equipment is Periodical Costs. 3. Lubricants for machinery and equipment used in production is Product Costs. 4. Depreciation of a factory building is a Product Costs. 5. Depreciation of manufacturing equipment is a Product Costs. 6. Depreciation of the company president's automobile is a Periodical Costs. 7. Leasehold costs for land on which factory buildings stand is a Periodical Costs. 8. Inspection costs of finished goods is a Product Costs. 9. Direct labor cost is a Product Costs. 10. Raw materials cost is a Product Costs. 11. Advertising expenses is a Periodical Costs.
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Fixed is the cost that is independent of the level of production. In other words, the cost which company has to bear whatever the production level is. Similarly variable cost is the cost that is dependent on the level of production, that is, the costs vary with the level of production. Wages paid to temporary workers is a variable cost because it occurs when the production is in process. Property taxes on factory building is a fixed cost because the company has to pay taxes every year whether the building is used or not in the process of production. Property taxes on administrative building is a fixed cost because the company has to pay taxes every year whether the building is used or not in the process of production. Sales commission is a variable cost as it varies with the production level. Electricity for machinery and equipment in the plant is a variable cost because it costs only when the machines are producing the output. Heat and air-conditioning (HVAC) for the plant is a fixed cost. Salaries paid to design engineers are variable costs. Regular maintenance on machinery and equipment is a fixed cost. Basic raw materials used in production are variable cost as they only needed when the company starts or doing production. Factory fire insurance is a fixed cost as it has no link with the level of production in the company. As mentioned above, here is the table of the 10 costs mentioned above and summarized in their respective categories: