QQuestionAccounting
QuestionAccounting
Explain whether each of these expenses of a textile mill is a fixed cost or a variable cost, and why:
(a) Repairs to a leaking roof
(b) Cotton
(c) Food for the mill's cafeteria
(d) Night security guard
(e) Electricity
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Answer
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Step 1:I'll solve this problem by analyzing each expense and categorizing it as either a fixed or variable cost with a clear explanation.
Step 2:: Understanding Cost Classifications
- Fixed costs: Expenses that remain constant regardless of production volume - Variable costs: Expenses that change in proportion to production volume
Step 3:: Analyzing Roof Repairs
(a) Repairs to a leaking roof: Fixed Cost - Reason: Roof repairs are typically a one-time or periodic expense - The cost does not directly change with the amount of production - Occurs regardless of how many textiles are manufactured
Step 4:: Analyzing Cotton
(b) Cotton: Variable Cost - Reason: Cotton is a direct material used in textile production - The amount of cotton used increases or decreases with the number of textiles produced - More production = more cotton needed - Less production = less cotton needed
Step 5:: Analyzing Cafeteria Food
(c) Food for the mill's cafeteria: Semi-Variable Cost - Partially fixed (base staffing) and partially variable (based on number of workers) - Cost changes somewhat with production levels and employee count - Could be considered a mixed cost
Step 6:: Analyzing Night Security Guard
(d) Night security guard: Fixed Cost - Reason: Security is typically a constant expense - Guard is employed regardless of production volume - Same salary paid whether production is high or low
Step 7:: Analyzing Electricity
(e) Electricity: Variable Cost - Reason: Electricity consumption increases with production - More machines running = more electricity used - Directly proportional to production volume
Final Answer
(a) Roof Repairs: Fixed Cost (b) Cotton: Variable Cost (c) Cafeteria Food: Semi-Variable Cost (d) Night Security Guard: Fixed Cost (e) Electricity: Variable Cost
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