Maurice Tutor
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Identification of Variable and Fixed Costs
Indicate whether each of the following costs of productive output is usually
(a) variable or (b) fixed:
1. Packing materials for stereo components
2. Real estate taxes
3. Gasoline for a delivery truck
4. Property insurance
5. Depreciation expense of buildings (calculated with the straight-line method)
6. Supplies
7. Indirect materials
8. Bottles used to package liquids
9. License fees for company cars
10. Wiring used in radios
11. Machine helper’s wages
12. Wood used in bookcases
13. City operating license
14. Machine depreciation based on machine hours used
15. Machine operator’s hourly wages
16. Cost of required outside inspection of each unit produced
(ii) Variable Cost Analysis
Zero Time Oil Change has been in business for six months. The company pays $0.50 per quart for the oil it uses in servicing cars. Each job requires an average of four quarts of oil. The company estimates that in the next three months, it will service 240, 288, and 360 cars.
1. Compute the cost of oil for each of the three months and the total cost for all three months.
|
 |
Cars to Be |
Required |
 |
Total |
|
Month |
Serviced |
Quarts/Car |
Cost/Quart |
Cost/Month |
|
1 |
240 |
4 |
$0.50 |
 |
|
2 |
288 |
4 |
0.50 |
 |
|
3 Three-month total |
888 360 |
4 |
0.50 |
|
2. Complete the following sentences by choosing the words that best describe the cost behavior at Zero Time Oil Change:
a. Cost per unit (increased, decreased, remained constant).
b. Total variable cost per month (increased, decreased) as the quantity of oil used (increased, decreased).
(iii) Mixed Costs: High-Low Method
Whitehouse Company manufactures major appliances. Because of growing interest in its products, it has just had its most successful year. In preparing the budget for next year, its controller compiled these data:
|
 |
Volume in |
 |
|
Month |
Machine Hours |
Electricity Cost |
|
July August September October |
6,000 5,000 4,500 4,000 |
$ 60,000 53,000 49,500 46,000 |
|
November |
3,500 |
42,500 |
|
December |
3,000 |
39,000 |
|
Six month total |
26,000 |
$290,000 |
Using the high-low method, determine (1) the variable electricity cost per machine hour, (2) the monthly fixed electricity cost, and (3) the total variable electricity costs and fixed electricity costs for the six-month period.
