Cost behavior and cost classifications are key components to efficiently utilizing managerial accounting techniques. In order to make decisions, accountants and managers must be able to correctly identify and classify each cost associated with a given product or service.
- Using your personal knowledge or the internet to select a product or service. The product or service does not have to be an actual product or service - it can be completely fictional. For the selected product or service, identify at least 5 costs involved with the product or service and complete the following questions. Classify each cost as direct or indirect.
- Identify the cost behavior as either variable, fixed or mixed.
- Provide a brief (2 or 3 sentences) on the relationship of these costs.
Please note you will need to make some assumptions about the product or service. Internal product information is generally not available to the public so you will need to make some educated guesses about what may be required.
Here is an example to help get you started:
Product: toothbrush
- Costs: Plastic for handle (direct materials, variable)
- Material for bristles (direct materials, variable)
- Plant electricity to run equipment (indirect, fixed)
- Labor to assemble each toothbrush (direct labor, variable)
- Glue/Adhesive to hold bristles (indirect, variable)
Relationship: As the number of toothbrushes made increases, the direct materials and direct labor will also increase to meet the demand. Electricity is required to operate other aspects in addition to the equipment so this a shared cost across all functions. Electricity is necessary cost for all operations and not solely for the production of toothbrushes.