One of the ways managers can classify costs is by behavior (variable or fixed). When you are trying to decide whether a cost is variable or fixed you need to think about two things: the cost in total and the activity What you are trying to determine is if there is a causal link between the cost (in total) and the activity. Let's think about the following costs - factory utilities and factory rent - and the following activity - units produced. To decide if these costs are fixed or variable you have to determine the following: Does the cost IN TOTAL change when the activity changes? Factory utilities - this cost would increase in total if production increased (more production means we will be running our machines more - so we will need more electricity). So this would be a variable cost. Factory rent - this cost would not change in total the more units we make - so this cost is a fixed cost. For each cost item listed below, indicate whether the cost is: 1) Variable or fixed (with respect to units produced and sold) 2) Period or Product 3) If a product cost - indirect or direct A) Salesperson's commissions B) Factory supervisor's salary C) Wages of laborers assembling product D) Lubricants for machines E) Advertising costs