Question

Account Analysis to Determine Cost Behavior Darnell Poston, owner of Poston Manufacturing, Inc., wants to determine the cost behavior of labor and overhead. Darnell pays his workers a salary, during busy times, everyone works to get the orders out. Temps (temporary workers hired through an agency) may be hired to pack and prepare completed orders for shipment. During slower times, Darnell catches up on bookkeeping and administrative tasks while the salaried workers do preventive maintenance, clean the lines and building, etc. Temps are not hired during slow times. Darnell found that workers' salaries, temp agency payments, rentals, utilities, and plant and equipment depreciation are the largest dollar accounts. He believes that workers' salaries and plant and equipment depreciation are fixed, temp agency payments are associated with the number of orders (since temp workers are used to pack and prepare completed orders for shipment), and electricity is associated with the number of machine hours. When the number of different parts stored by Poston exceeds the space in the materials storeroom, Darnell rents nearby warehouse space. He can rent as much or as little space as he wants on a month-to-month basis. Therefore, he believes warehouse rental payments are variable with the number of parts purchased and stored. The account balances for the past six months as well as the six-month total are as follows: Workers' Salaries Temp Agency Payments Warehouse Rental Plant & Equipment Depreciation Electricity January $7,200 $150 $2,200 $275 385 February 540 350 7,200 7,200 March 1,100 655 695 2,200 2,200 2,200 7,200 1,350 340

Answer 1

Workers' salaries are FIXED COST as every worker works during busy times to get orders out and also the amount of $7200 is fixed for each month. Thus it is a FIXED COST.

Temp agency payments are VARIABLE COSTS as they are only hired when required and also the amounts are different in each month. Hence VARIABLE COST.

Warehouse Rental is VARIABLE COST as it is rented when required and also the amount per month is different.

Electricity is VARIABLE COST as it varies with the usage.

Plant and Equipment Depreciation is FIXED COST as the amounts are same for each month.