Direct materials cost that varies with the number of units produced is an example of a fixed cost of production.
The correct answer and explanation is :
The correct answer is: False
Explanation:
Direct materials cost is a variable cost, not a fixed cost. A fixed cost is one that remains constant regardless of the number of units produced, such as rent, salaries of permanent staff, and depreciation. On the other hand, a variable cost changes with production levels.
Why Direct Materials Cost is a Variable Cost:
- Changes with Production Volume
Direct materials, such as raw materials used in manufacturing, increase as more units are produced. For example, if a factory produces chairs, the cost of wood, screws, and paint will increase as more chairs are made. - Direct Relationship with Units Produced
The cost per unit of direct materials remains the same, but the total cost varies based on the number of units produced. If production stops, no direct material costs are incurred. - Not a Fixed Cost
Fixed costs do not change with production levels. Examples include rent, insurance, and salaries of permanent employees. These remain the same regardless of whether one unit or 1,000 units are produced.
Example:
- If a company produces 100 units of a product and each unit requires $5 of raw materials, the total direct materials cost is $500.
- If production increases to 200 units, the total direct materials cost rises to $1,000.
- However, if production stops, the direct materials cost becomes $0.
Since direct materials costs fluctuate with production, they are classified as variable costs, not fixed costs.
Here is an infographic illustrating the difference between fixed and variable costs in production. It visually distinguishes between costs that remain constant (fixed) and those that fluctuate with production levels (variable).