91Ó°ÊÓ

Classification of costs, service sector. Market Focus is a marketing research firm that organizes fo cus groups for consumer-product companies. Each focus group has eight individuals who are paid \(\$ 60\) per session to provide comments on new products. These focus groups meet in hotels and are led by a trained independent marketing specialist hired by Market Focus. Each specialistis paid a fixed retainer to conductt a minimum number of sessions and a per session fee of \(\$ 2,200\). A Market Focus staff member attends each session to ensure that all the logistical aspects run smoothly. Classify each cost item (A-H) as follows: a. Direct or indirect (D o r I) costs of each individual focus group b. Variable or fixed (V or F) costs of how the total costs of Market Focus change as the number of focus groups conducted changes. (If in doubt, select on the basis of whether the total costs will change sub stantially if there is a large change in the number of groups conducted. You will have two answers (D or l; V or F) for each of the following items: Cost Item. A. Payment to individuals in each focus group to provide comments on new products. B. Annual subscription of Market Focus to Consumer Reports magazine. C. Phone calls made by Market Focus staff member to confirm individuals will attend a focus group session (Records of individual calls are not kept.) D. Retainer paid to focus group leader to conduct 18 focus groups per year on new medical products. E. Recruiting cost to hire marketing specialists. F. Lease payment by Market Focus for corporate office. G. cost of tapes used to record comments made by individuals in a focus group session (These tapes are sent to the company whose products are being tested.) H. Gasoline costs of Market Focus staff for company-owned vehicles (Staff members submit monthly bills with no mileage breakdowns.) I. costs incurred to improve the design of focus groups to make them more effective.

Step by step solution

01

Cost Item A: Payment to individuals in each focus group to provide comments on new products.

This is a Direct cost because the payment goes directly to the focus group participants. This is also a Variable cost since it increases with the number of focus groups conducted.

02

Cost Item B: Annual subscription of Market Focus to Consumer Reports magazine.

This is an Indirect cost because it is not easily traceable to any particular focus group. It is a Fixed cost because the subscription cost does not change with the number of focus groups conducted.

03

Cost Item C: Phone calls made by Market Focus staff member to confirm individuals will attend a focus group session (Records of individual calls are not kept).

This is an Indirect cost because it is difficult to trace specific phone calls to particular focus groups. It is a Variable cost because the number of phone calls will increase as the number of focus groups conducted increases.

04

Cost Item D: Retainer paid to focus group leader to conduct 18 focus groups per year on new medical products.

This is a Direct cost since it is related to conducting a specific number of focus groups. It is a Fixed cost because the retainer is paid regardless of the number of focus groups conducted.

05

Cost Item E: Recruiting cost to hire marketing specialists.

This is an Indirect cost as it is not directly related to a particular focus group. It is a Fixed cost because the recruiting cost is the same regardless of the number of focus groups conducted.

06

Cost Item F: Lease payment by Market Focus for corporate office.

This is an Indirect cost because it is not directly associated with any individual focus group. It is a Fixed cost as the lease payment does not change with the number of focus groups conducted.

07

Cost Item G: Cost of tapes used to record comments made by individuals in a focus group session (These tapes are sent to the company whose products are being tested.)

This is a Direct cost as the tapes are directly related to each focus group. It is a Variable cost since more tapes are needed as the number of focus groups conducted increases.

08

Cost Item H: Gasoline costs of Market Focus staff for company-owned vehicles (Staff members submit monthly bills with no mileage breakdowns.)

This is an Indirect cost because it is hard to trace the gasoline cost to specific focus groups. It is a Variable cost since gasoline consumption increases with the number of focus groups conducted.

09

Cost Item I: Costs incurred to improve the design of focus groups to make them more effective.

This is an Indirect cost as it is not directly related to a specific focus group. It is a Fixed cost because the cost does not change with the number of focus groups conducted.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Direct and Indirect Costs

Understanding the difference between direct and indirect costs is crucial for businesses and students alike. Direct costs are expenses that can be directly tied to the production of a specific product or service. For instance, in a marketing research firm like Market Focus, the payments to individuals participating in focus groups are direct costs because they are made specifically for each focus group session. These costs vary depending on the number of focus groups held.

Indirect costs, on the other hand, do not have a direct correlation to a specific product or service, making them more challenging to assign to a single focus group. For example, the annual subscription to Consumer Reports magazine would be considered an indirect cost for Market Focus since it supports the business as a whole and is not attributable to any single focus group.

When classifying costs as direct or indirect, it is important to ask whether the cost can be specifically and easily traced to producing a particular service or product. Improving students' understanding of these concepts can be facilitated by providing real-world examples that illustrate the implications of these classifications in a business's accounting processes.

Variable and Fixed Costs

Categorizing costs into variable and fixed is another fundamental aspect of cost accounting. Variable costs change with the level of output or activity. In the case study of Market Focus, the cost of tapes to record focus group sessions is a variable cost because they are used in direct proportion to the number of focus groups conducted. More focus groups mean more tapes needed.

Fixed costs, conversely, do not fluctuate with the volume of activity within a certain range. Even if the number of focus groups changes, fixed costs such as the lease payment for the Market Focus corporate office remain constant. A deep understanding of these costs helps businesses in the service sector predict how changes in activity will affect their overall expenses.

Using practical examples, such as the retainer fee paid to marketing specialists regardless of how many sessions they lead, assists students in grasping the concepts of variable and fixed costs. This distinction is pivotal in planning, budgeting, and decision-making processes within any business.

Cost Accounting in Service Sector

Cost accounting in the service sector has its unique challenges. In service-oriented businesses like Market Focus, it can be more difficult to trace costs to a specific service than it is in manufacturing due to the intangible nature of the services provided. Nonetheless, the same principles of cost classification apply.

In the service sector, understanding the behavior of costs is essential for setting prices, controlling expenses, and ensuring profitability. Direct costs, such as payments to focus group participants, directly impact the cost of providing the service and can help in determining pricing strategies. Indirect costs, such as the lease payment, allocate to multiple services and require careful management to keep the business cost-efficient.

By analyzing these costs, service companies can make strategic decisions. For example, if the cost to improve focus group designs is seen as a worthwhile investment, it could lead to more effective groups and ultimately, greater client satisfaction and higher revenue. Teaching students about cost behaviors through examples in the service sector provides them with applicable knowledge for their future careers in various industries.