The Fremont, CA plant of New United Motor Manufacturing Inc (NUMMI), a joint venture of General Motors and Toyota, assembles two types of cars (Corollas and Prisms). Separate assembly lines are used for each type of car. Classify each of the following cost items as: • fixed or variable with respect to the cars assembled
• direct or indirect with respect to the specific type of car assembled

Variable Fixed Direct Indirect

Cost of tires on Geo Prism
Salary of public relations manager for NUMMI plant
Annual awards dinner for Corolla suppliers
Salary of Prism design engineer
Freight costs of Corolla engine
Electricity cost of NUMMI plant
Wages paid to assembly-line temps in times of high production
Annual plant fire ins. policy

Solution :

Fixed Cost : Fixed cost is the cost of production or in an assembly that remains the same for any production output.

Variable cost : Variable cost does not remain the same. It varies and may include cost of raw materials, labor costs, commissions, etc. It is based on the amount of the output produced.

Direct Cost : Direct cost are the cost that directly goes into the cost of producing goods or services. It is traced to various cost objects.

Indirect Cost : Indirect cost are the expenses of the business related which keeps and operation going on. It includes administrative expenses and also depreciation, etc.

In the context, the classification of different costs are :

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