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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Classify costs

Seymour Clothing Co. manufactures a variety of clothing types for distribution to several major retail chains. The following costs are incurred in the production and sale of blue jeans:

a. Shipping boxes used to ship orders

b. Consulting fee of $200,000 paid to industry specialist for marketing advice

c. Straight-line depreciation on sewing machines

d. Salesperson's salary, $10,000 plus 2% of the total sales

e. Fabric

f. Dye

g. Thread

h. Salary of designers

i. Brass buttons

j. Legal fees paid to attorneys in defense of the company in a patent infringement suit.

$50,000 plus 587 per hour

k. Insurance premiums on property, plant, and equipment, $70,000 per year plus $5 per 530,000 of insured value over $8,000,000

l. Rental costs of warehouse, $5,000 per month plus $4 per square foot of storage used

m. Supplies

n. Leather for patches identifying the brand on individual pieces of apparel

o. Rent on plant equipment, $50,000 per year

p. Salary of production vice president

q. Janitorial services, $2,200 per month

r. Wages of machine operators

s. Electricity costs of $0.10 per kilowatt-hour

t. Property taxes on property, plant, and equipment

Instructions

Classify the preceding costs as fixed, variable, or mixed. Use the following tabular headings and place an X in the appropriate column. Identify each cost by letter in the cost column.

Fixed Cost Cost Mixed Cost Variable Cost

To determine

Variable costs: These are the costs that proportionately change with the changes in the activity base such as units of production Common examples of variable costs are direct materials and direct labor costs.

Fixed Costs: These are the costs that remain constant in total dollar amount irrespective to the changes in the activity base such as units of production. Common examples of fixed costs are factory overhead costs and straight-line depreciation expenses.

Mixed Costs: It refers to those costs that possess has characteristics of both fixed cost and variable cost. Common examples of mixed costs are manufacturing overhead and selling and administrative expenses.

To classify: the given costs as fixed cost, variable cost, and mixed cost.

Explanation

Classify the given costs as fixed cost, variable cost, and mixed cost.

Cost Fixed cost Variable cost Mixed cost
a. X
b. X
c. X
d. X
e. X
f. X
g. X
h. X
i. X
j. X
k. X
l. X
m. X
n. X
o. X
p. X
q. X
r. X
s. X
t. X

Table (1)

a.

Shipping boxes used to ship orders is a variable cost. This is because, the cost of shipping boxes to be used changes with the change in the number of ship orders.

b.

Consulting fee of $200,000 paid to industry specialist for marketing advice is a fixed cost. This is because, the amount of consulting fee remains constant as it is not affected by the company’s operational activities.

c.

Straight-line depreciation on sewing machines is a fixed cost. This is because, the depreciation amount under straight-line method remains constant each year. It does not change with the change in the number of units produced by the sewing machines.

d.

Salesperson’s salary, $10,000 plus 2% of the total sales is a mixed cost. This is because, the total amount of salary has both the fixed and the variable component. The amount of $10,000 salary is fixed and the salary on the 2% of the total sales is variable as it would change with the change in the number of units sold.

e.

Fabric is a variable cost. This is because, it is a direct material cost to be used for making finished goods (clothes) ready to be sold. The cost would change with the change in the number of units to be produced.

f.

Dye is a variable cost. This is because, it is a direct material cost to be used for making finished goods (clothes) ready to be sold. The cost would change with the change in the number of units to be produced.

g.

Thread is a variable cost. This is because, it is a direct material cost to be used for making finished goods (clothes) ready to be sold. The cost would change with the change in the number of units to be produced.

h.

Salary of designers is a fixed cost. This is because, the cost of the salary would remain constant irrespective to the number of units produced or sold.

i...

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