Question

Sal's Salami Company processes salami at its plants in Canton, Holly Springs, and Waleska. Sal's accountant Bart prepares monthly income statements segmented by plant. These income statements are organized to disclose contribution margin, performance margin, and responsibility margin for each plant, in addition to operating income for the company as a whole.

Of the following, which should be classified as a common fixed cost?
A. Depreciation on the Schenectady factory.
B. Salaries of the plant managers.
C. Salaries of the company's legal staff.
D. Property taxes on the Waleska plant

Answer 1

The 'Salaries of the company's legal staff' should be classified as a common fixed cost because this expense supports the entire company rather than being attributable to a specific plant.

Step-by-step explanation:

When examining the classification of costs within a company like Sal's Salami Company, it is important to distinguish between fixed and variable costs, as well as direct and common fixed costs. A common fixed cost is a cost that is not associated with a specific segment of a business like one of its plants but rather is shared across multiple segments. In the context of the income statements prepared by Bart for Sal's Salami Company, common fixed costs would include expenses that are not directly attributable to any single plant but support the operations of the company as a whole.

Of the options provided, "Salaries of the company's legal staff" would be classified as a common fixed cost because legal staff typically serves the entire company and not any particular plant exclusively. On the other hand, depreciation on a specific factory, salaries of plant managers, and property taxes on a particular plant would not be considered common fixed costs as they are directly linked to individual plants and therefore would be segmented in the responsibility margins of those respective plants.