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Accounting - Identifying Cost Behavior

Identifying Cost Behavior

Hoover's Kitchen, a fast-food restaurant co., operates a chain of restaurants across the nation. Each restaurant employs 8 people; one is a manager paid a salary plus a bonus equal to 3% of sales. Other employees, two cooks, one dishwasher, and four
waitresses are paid salaries. Each manager is budgeted $3,000 per month for advertising cost. Classify each of the following costs incurred by the co. as fixed, variable, or mixed.
a.Manager's compensation relative to the number of customers.
b.Waitresses' salaries relative to the number of restaurants.
c. Advertising costs relative to the no. of customers for a particular restaurant.
d. Rental costs relative to the no. of restaurants.
e. Cooks' salaries at a particular location relative to the number of customers.
f. Cost of supplies (cups, plates, spoons, etc.) relative to the no. of customers.

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Solution Preview

Hi there,

First, here is some information for you regarding fixed vs variable costs:

Fixed costs are expenses whose total does not change in proportion to the activity of a business. (Indirect costs may be fixed or variable.) For example, a retailer must pay rent and utility bills irrespective of sales volumes. Fixed costs include, but are not limited to, overheads (rent, electricity, insurance, and such) but can include direct costs such as payroll (particularly salaries).

Variable costs by contrast change in direct proportion to the activity of a business such as sales or production volume. In retail the cost of goods is almost entirely variable. In ...