Fixed vs. Variable Costs: Classification Practice
Now you have an opportunity to practice what you've gone through to make sure you understand the concept.
Required: Classify each of the following costs as fixed, variable, mixed, or step with respect to the units of product produced.
- Factory maintenance crew salaries
Step +
You are correct! Here we have what is probably a step cost. Why is it a step cost? It may be that you have a maintenance crew of ten people, and you need a maintenance crew of ten people in order to build the one million units you expect to build this year. But, if you increase production, you're going to run the machines more and need more maintenance, and you have to hire more people for the maintenance crew once you reach a certain level of production. And the same is true if you cut production. You could lay off some of the people on the maintenance crew. But it may take a 100,000-unit change in production before you need to add or terminate a maintenance worker.
- Factory electricity
Mixed +
You are correct! Because there would be a certain amount of utility bill that would be incurred just from having the lights on and then there would be additional utilities consumed as units went down the assembly line.
- Factory building straight-line depreciation
Fixed +
You are correct! Because you calculate straight-line depreciation based on time, it is not affected by the number of units produced. It's a certain amount that will be the same whether you produce zero units or you produce the maximum number of units that you could possibly produce in that plant.
- Factory machinery units-of-output depreciation
Variable +
You are correct! When you compute units-of-output depreciation, you are saying depreciation is a certain amount per unit. Therefore, it varies directly with the number of units produced, making it variable. Or it is at least acting as a variable cost.
- Factory supervisor's salaries
Step +
You are correct! It is a step cost just like maintenance crew salaries.
- Factory land and building property taxes
Fixed +
You are correct! The property tax is based on the value of the property, not the number of units produced on the property. Therefore, like the factory building straight-line depreciation, it is a fixed cost.