Which of the following classifications of cost items by cost behavior is correct?

• A. Direct materials: Variable cost; Factory rent: Fixed cost; Indirect labor: Fixed cost
• B. Direct materials: Fixed cost; Factory rent: Variable cost; Indirect labor: Fixed cost
• C. Direct materials: Fixed cost; Factory rent: Fixed cost; Indirect labor: Variable cost
• D. Direct materials: Variable cost; Factory rent: Fixed cost; Indirect labor: Variable cost

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of cost behavior. Costs are classified as either variable or fixed based on how they change with the level of activity. Variable costs change directly with production volume, while fixed costs remain constant regardless of production levels.
2. Step 2: Analyze the cost item 'Direct materials.' Direct materials are typically considered variable costs because the amount used depends on the quantity of goods produced. For example, more raw materials are needed as production increases.
3. Step 3: Examine the cost item 'Factory rent.' Factory rent is generally classified as a fixed cost because it does not change with the level of production. The rent remains constant regardless of how many units are produced.
4. Step 4: Evaluate the cost item 'Indirect labor.' Indirect labor can be classified as either fixed or variable depending on the nature of the work. However, in most cases, indirect labor (e.g., supervisors' salaries) is considered a fixed cost because it does not vary directly with production levels.
5. Step 5: Compare the classifications provided in the options with the explanations above. The correct classification should align with the definitions of variable and fixed costs for each cost item: Direct materials (Variable cost), Factory rent (Fixed cost), Indirect labor (Fixed or Variable cost depending on context).