D. Discretionary costs by definition are costs that management does not have to incur. They are therefore not unavoidable and can be either fixed or variable. Value-added costs normally enhance the product and this would not be something that management would normally not incur.

C. A variable cost must be incurred every time you make or sell a product. Therefore, as you make one more you have to incur costs for one more, which is in direct proportion. Fixed costs do not change with changes in volume, so a fixed cost and any cost that has fixed cost in it (a. b.) are not correct.

A. A mixed cost by definition consists of both fixed and variable characteristics. It must be both, if it is either it is just called a fixed cost or a variable cost. Product and period is not correct as these are two very different types of costs related to if the cost is inventory or expensed in the period incurred. Direct and indirect is not correct as these are two very different types of costs which are related to whether or not a cost has to be allocated to a product.

C. By definition, a variable cost remains constant per unit and changes in total as volume changes. The formula for determining total variable cost is cost per unit x volume = total variable cost As volume changes, total variable cost changes and the cost per unit does not change. (b.) is how a fixed cost behaves.

D. Utilities are paid for based on usage. If there is a base part paid first and then you pay for what you use, it is a mixed cost. A mixed cost has a fixed and variable part to it. Assembly line labor is a variable cost only, as it is incurred as based on how many products are made and changes with volume changes. Salaries of anyone is a fixed cost, which does not change as production/sales volumes change. Sales commission expense is a variable cost, since more is paid to the salesperson for selling more.

Important to notice:

All costs that are annually or monthly are fixed. They do not change because production or sales is more or less.

All costs that are “per shoe” are variable. Each time another shoe is produced, this much additional cost must be incurred.

The sales commission varies with sales dollars. As sales increase the total cost will increase. For variable costs, total costs change with changes in sales or production.

V 1. rubber for the sole of the shoe, $6 per shoe
F 2. rent on the manufacturing facility building, $188,000 annually
F 3. sales manager salary, $127,000 annually
V 4. worker who operate the machine that puts the shoe together, $2 per shoe
V 5. shoe laces, $1.80 per shoe
V 6. worker who puts the shoes in the shoe box, $0.20 per shoe
F 7. insurance on the manufacturing facility, $23,000 annually
F 8. water and utilities, $22,000 per month consistently
F 9. depreciation on manufacturing equipment, $18,000 each month
F 10. already contracted advertising on television, $1,800,000 annually
V 11. sales commission paid to salespeople, 5% of sales, currently $2.50 per pair
F 12. office supplies, usually run approximately $3,000 per month
F 13. paper for the copier in the executive offices, usually about $1,200 per month
V 14. glue used in the shoe, approximately $0.18 per shoe
F 15. company jet lease, $14,000 per month

Important to Notice:

Costs that are the same in total for both volumes are fixed.

Costs that are the same per lawn (per unit) regardless of the volume are variable costs. To determine the cost per unit, divide the total dollars by the volume. When it is the same for both levels of volume it is a fixed cost.

Costs that are not fixed or variable are mixed costs. These costs are not the same per unit or in total.