Everything Looks Like a Nail, Inc. is a manufacturing company that produces hammers. The company faces a number of different fixed and variable costs in the short run. Determine which of the costs are examples of fixed costs and which are examples of variable costs. Assume the company cannot easily adjust the amount of capital that it uses and that salaries are negotiated only once per year.

a. Regulatory compliance costs

b. Salaries of top management and key personnel

c. Cost of metal used in manufacturing

d. Cost of wood used in manufacturing

e. Mortgage payments

f. Industrial equipment costs

g. Interest on debt

h. Postage and packaging costs

a. Regulatory compliance costs - Fixed cost

b. Salaries of top management and key personnel - Fixed cost

c. Cost of metal used in manufacturing - Variable cost

d. Cost of wood used in manufacturing - Variable cost

e. Mortgage payments - Fixed cost

f. Industrial equipment costs - Fixed cost

g. Interest on debt - Fixed cost

h. Postage and packaging costs - Variable cost

Explanation:

The cost which is affected by the production of units is known as variable cost. The cost which does not vary with the units produced is fixed cost. Fixed cost does not change from period to period irrespective of level of output and is usually same for a certain period. It is easy to budget for fixed costs instead of variable cost. Variable cost changes every period and is based on company's output.

Example of fixed costs

a. Regulatory compliance costs - Fixed cost

b. Salaries of top management and key personnel - Fixed cost

e. Mortgage payments - Fixed cost

f. Industrial equipment costs - Fixed cost

g. Interest on debt - Fixed cost

Example of variable cost

c. Cost of metal used in manufacturing - Variable cost

d. Cost of wood used in manufacturing - Variable cost

h. Postage and packaging costs - Variable cost

Explanation:

Fixed cost:

These are costs that does not change over a short period a of time, they remain constant throughout the production period, the cost is not affected by change in production process or output, example are cost of rent, machinery, building etc.

Variable costs:

These are costs that vary with changes in the production process or activity level of the business, they changes over a short period of time. Examples of variable costs are salaries, utilities, materials used in production etc.