Use the account-classification method of cost estimation to classify each of the

Question

Use the account-classification method of cost estimation to classify each of the following cost as variable, fixed or semivariable. Before classifying the costs, choose and appropriate measure for the schools costs. Explain your choice.

1. Fee charged by a local public accounting firm to audit the school's accounting records.
2. Wages of the school's part-time assistant recital instructors. They are hired on a temporary basis. For each student enrolled in the school's music programs, four hours of assistant instructor time are needed per week.
3. Depreciation on the school's musical instruments.
4. Rent for the building in which the school operates.
5. Electricity for the school. The school pays a fixed monthly charge plus $.11 per kilowat of electricity.

Explanation / Answer

1. Fee charged by a local public accounting firm to audit the school's accounting records. A: THis is a fixed expense. It is agreed as part of teh Scope of Audit. It may vary from year to year but is constant during the year. 2. Wages of the school's part-time assistant recital instructors. They are hired on a temporary basis. For each student enrolled in the school's music programs, four hours of assistant instructor time are needed per week. A: Variable exp : The Wage expense varies with the no of students & is directly prop to no of students. 3. Depreciation on the school's musical instruments. A: Fixed during teh year. Dep is calculated based on various dep methods. For Musical instruments, SLN method is used. It is Dep = (Cost of asset-Salvage)/Life. Thus it is determined when asset was bought and is expensed over the life of asset 4. Rent for the building in which the school operates. A: Fixed : Rent exp is fixed for teh duration of teh rental agreement with annual increase clause. Thus over a yea the ren exp is fixed. 5. Electricity for the school. The school pays a fixed monthly charge plus $.11 per kilowat of electricity. A: Semi Variable : Electicty cost has two components : A Fixed monthly charge + A Var charge linked to the units of electrivity consumed.

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