Chapter 18, Problem 4E

To determine

Concept Introduction:

Variable cost and fixed costs:

Variable costs:

The variable costs can be defined as the cost that change directly with the change in the level of output. They are directly related with the level of output. These costs are termed relevant costs as well.

Fixed costs:

The fixed costs can be defined as the cost that do not change directly with the change in the level of output. They are not related with the level of output. These costs are termed irrelevant costs generally.

Direct and Indirect costs:

Direct costs:

Direct costs can be defined as the cost which can be directly associated or linked with each unit of product. For example, 1 lbs raw material used to produce 1 furnished unit and 1 labor hour is required to produce 1 furnished unit.

Indirect costs: Indirect costs can be defined as the cost which cannot be directly associated or linked with each unit of product. For example, supervisor's salary for the month or depreciation of the equipment etc.

To classify:

The following costs as either (a) variable or fixed and (b) direct or indirect costs.