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# Cost Classifications

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The following are cost associated with manufacturing firms, merchandising firms, or service firms:

A. Legal services for an accounting firm
B. Car leases for company management
C. Oil used to serve manufacturing equipment
D. Office supplies for a grocery store
E. Entertainment expense for clients
F. Travel expenses for doctors in a medical firm
G. Plastic used in making computers
H. Collections cost of accounts receivable
I. Electricity to run saws at a lumber yard
J. Food for a company banquet
L. Continuing education for a doctor
M. Commission paid to a sales person
N. Depreciation on sports equipment by a professional football team
O. Calculators used by office employees
P. Fuel used by baggage transporters at an airport
Q. Toll charges incurred because of business travel
R. Fuel used in manufacturing equipment

Classify the cost as (1) product or period (2) variable or fixed; and (3) for those that are product cost, as direct materials, direct labor, or manufacturing overhead. Write "not applicable (N/A)" if a category does not apply.

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#### Solution Preview

Product costs are those which go in the making of the product and so are in the nature of manufacturing costs
Period costs are expensed as incurred
Variable costs are which change with production or sales
Fixed costs remain constant

Based on the above we classify the costs. A service firm does not do any manufacturing and so will not have any product costs

A. Legal services for an accounting firm

(1) Period Cost (2) Fixed cost since the accounting firm provides accounting services and so legal services would not change with accounting assignments (3) N/A

B. Car leases for company management

(1) Period Cost (2) Fixed cost as it will be fixed for each car (3) N/A

C. Oil used to serve manufacturing equipment

(1) Product Cost (2) Variable cost since the oil used would ...

#### Solution Summary

The solution explains how to classifiy costs as (1) product or period (2) variable or fixed; and (3) for those that are product cost, as direct materials, direct labor, or manufacturing overhead.

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