Question

Monthly production costs in Dilts Company for two levels of production are as follows. Cost 2,000 Units 4,000 Units Indirect labor $10,000 $20,000 Supervisory salaries 5,000 5,000 Maintenance 4,000 6,000 Indicate which costs are variable, fixed, and mixed. Indirect labor select a type of costs Supervisory salaries select a type of costs Maintenance select a type of costs

Answer 1

Indirect Labor - Variable Cost

This is a Variable cost as it changes alone with the production quantity. At 2,000 units the Indirect labor costs were $10,000 and at 4,000 units that figure had gone up to $20,000.

Supervisory Salaries - Fixed Costs

These salaries are a fixed cost because fixed costs do not change with production quantity and neither did these. When quantity produced was 2,000 units, these salaries were $5,000 and this did not change even when production quantity went up to 4,000 units.

Maintenance Salaries - Mixed Costs

Mixed costs have elements of both fixed and variable costs. The Maintenance cost per unit here is;

= (6,000 - 2,000) / ( 4,000 - 2,000)

= $2 per unit

Cost when units are 2,000 using the $2 per unit rate is indeed $4,000. However if the $2 per unit was multiplied with 4,000 units, the cost should be $8,000 instead it is $6,000. It is therefore a mixed cost.