Chapter 1, Problem 14E

To determine

Fixed and Variable Costs in Manufacturing:

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced.

• Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced.

• Examples are costs of factory rent, depreciation on plant and equipment

• Manufacturing costs are costs that are directly incurred in connection with manufacture of goods.

• Examples are Direct materials and Manufacturing Overhead

• Sunk Costs are historical costs. These costs have been incurred and are excluded from cost calculations as the probability of future benefits does not have any impact on historical costs.

• Examples are cost of blueprints of a project that is to be scrapped

• Opportunity cost is the cost of the opportunity foregone in order to choose the current cost alternative.

• Examples are Assured Interest foregone on an investments in order to finance another investment alternative.

Whether costs are:

• Fixed or variable and,
• Manufacturing cost or not
• Product cost or period cost
• Sunk Cost or Opportunity Cost