Question

Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.

Answer 1

Fixed costs are constant regardless of production levels, such as rent, while variable costs fluctuate with production volume, like labor expenses. Knowing the difference helps in classifying costs and calculating key metrics like total cost and marginal cost.

Step-by-step explanation:

Understanding Fixed and Variable Costs: When analyzing cost structures in a business, there is a distinct difference between fixed costs and variable costs. Fixed costs are expenses that do not fluctuate regardless of the quantity of goods or services a company produces, such as rent, machinery, or advertising. For example, the rent for a factory space is constant whether the factory is operating at full capacity or not. On the other hand, variable costs change with the level of production. This includes costs such as labor, raw materials, and utilities used in manufacturing. For instance, a barber shop might have a fixed cost of $160 per day for the space and equipment, while the cost of hiring barbers is variable at $80 per barber daily, changing with the number of barbers they employ.

To classify each of the Lee’s costs as either variable or fixed, one must identify whether the cost changes with the level of production or not. This determination forms the basis for important calculations like total cost, average variable cost, average total cost, and marginal cost, which can be derived using formulas from economics or managerial accounting resources.