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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

Cromwell Furniture Company manufactures sofas for distribution to several major retail chains. The following costs are incurred in the production and sale of sofas:

a. Fabric for sofa coverings

b. Wood for framing the sofas

c. Legal fees paid to attorneys in defense of the company in a patent infringement suit, $25,000 plus $160 per hour

d. Salary of production supervisor

e. Cartons used to ship sofas

f. Rent on experimental equipment. $50 for every sofa produced

g. Straight-line depreciation on factory equipment

h. Rental costs of warehouse, $30,000 per month

i. Property taxes on property, plant, and equipment

j. Insurance premiums on property, plant, and equipment, $25,000 per year plus $25 per $25,000 of insured value over $16,000,000

k. Springs

1. Consulting fee of $120,000 paid to efficiency specialists

m. Electricity costs of $0.13 per kilowatt-hour

n. Salesperson's salary, $80,000 plus 4% of the selling price of each sofa sold

o. Foam rubber for cushion fillings

p. Janitorial supplies, $2,500 per month

q. Employer’s FICA taxes on controller’s salary of $180,000

r. Salary of designers

s. Wages of sewing machine operators

t. Sewing supplies

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.

Cost Fixed Cost Variable Cost Mixed 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.

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

b.

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

c.

Legal fees paid to attorneys in defense of the company in a patent infringement suit, $25,000 plus $160 per hour is a mixed cost. This is because, the total amount of legal fees has both the fixed and the variable component. The amount of $25,000 legal fees is fixed and the $160 per hour is variable as it would change with the change in the number of hours worked.

d.

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

e.

Cartons used to ship sofas is a variable cost. This is because, the cost of cartons to be used changes with the change in the number of sofas to be shipped.

f.

Rental on experimental equipment, $50 for every sofa produced is a variable cost. This is because, the cost of rent to be incurred changes with the change in the number of sofas to be produced.

g.

Straight-line depreciation on factory equipment 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 factory equipment.

h.

Rental costs of warehouse, $30,000 per month is a fixed cost. This is because, the cost of the rent would remain constant irrespective to the space used for storage in the warehouse...

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