FIXED VERSUS VARIABLE COSTS

PRODUCT VERSUS PERIOD COSTS

A manufacturer produces and sells 1000 gadgets. Each gadget sells for $10.00 and costs $9.00 to produce and market. Costs are composed of the following elements:

Labor $2.35

Direct Materials $1.05

Rework Costs $0.20

Variable Manufacturing Overhead $0.65

(eg. Maintenance)

Depreciation of Plant $0.45

Plant Administration Costs $1.40

Packaging and Shipping Costs $0.70

Sales Commissions (per unit) $1.00

Marketing and Administration $1.20

Total $9.00

Based on the above information, classify the above costs into the following categories and then answer the questions on the next page. All the answers are in monetary terms. The Chart on Page 3 may also help you.

VARIABLE FIXED TOTAL

COSTS COSTS COSTS

Product Cost

(Included in Inventory) $_________ $_________ $________

Period Cost $_________ $_________ $________

(Expensed as Incurred)

Total Cost $_________ $_________ $_________

What is the minimum price required in the long run?

What is the minimum price required in the short run?

What is the cost of finished goods inventory?

What are the losses incurred in a short run shutdown?

What number should be the basis for evaluating the plant managers performance in the relatively short run?

What will appear as Selling, General & Administrative expense in the income statement?

What costs may be particularly negotiable in a special order situation?

What costs reflect capacity to produce?

What costs reflect capacity to sell and market?