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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Identifying Variable Costs, Committed Fixed Costs, and Discretionary Fixed Costs

Required:

Classify each of the following costs for a jeans manufacturing company as a variable cost, committed fixed cost, or discretionary fixed cost.

  1. a. The cost of buttons
  2. b. The cost to lease warehouse space for completed jeans—the lease contract runs for 2 years at $5,000 per year
  3. c. The salary of a summer intern
  4. d. The cost of landscaping and mowing the grass—the contract with a local mowing company runs from month to month
  5. e. Advertising in a national magazine for teenage girls
  6. f. Electricity to run the sewing machines
  7. g. Oil and spare needles for the sewing machines
  8. h. Quality training for employees—typically given for 4 hours at a time, every 6 months
  9. i. Food and beverages for the company Fourth of July picnic
  10. j. Natural gas to heat the factory during the winter

To determine

Categorize the cost as variable, committed fixed cost, or discretionary fixed cost in a jeans manufacturing company.

Explanation

Cost:

Cost can be defined as the cash and cash equivalent which is incurred by the organization to produce products or its related services which will benefit the organization in the future.

Variable Cost:

Variable cost is the cost which varies due to the changes in the level of output to produce products and services in a relevant range.

Fixed Cost:

Fixed cost is the cost which is not affected by the change in level of output to produce goods and services in a relevant range.

Committed Fixed Cost:

Committed fixed cost is the type of fixed cost that cannot be curtailed or avoided by the business. For example, office rent.

Discretionary Cost:

Discretionary cost is the type of fixed cost that can be avoided for short term without affecting the profitability. For example, advertisement cost.

Classification of cost in a jeans manufacturing company is shown below:

 Costs incurred by the company.Type of Cost
a.Button cost.Variable costCost of buttons depends on the number of jeans manufactured. It varies if the quantity produce varies.
b.Warehouse space on lease.Committed fixed costLease rent is an unavoidable fixed expense for the company.
c.Salary to summer interns.Discretionary fixed costSalary is given to summer interns for a particular time period only. The cost can be eliminated by avoiding summer interns hiring.
d...

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