CPIM Practice Exam

What classification of expense includes depreciation and utilities in a manufacturing company?

1. Direct Labor

2. Fixed Overhead

3. Variable Costs

4. Direct Material

The correct answer is: Fixed Overhead

The correct classification of expense that includes depreciation and utilities in a manufacturing company is fixed overhead. Fixed overhead refers to costs that do not fluctuate with the level of production; they remain constant regardless of how many units are produced. Depreciation represents the allocation of the cost of tangible assets over their useful lives, and utilities, while they may vary somewhat with production levels, are often considered fixed for budgeting purposes as they usually have a base level of cost that remains constant. Direct labor and direct materials are associated with the costs that fluctuate with production volumes. Direct labor includes the wages of employees directly involved in manufacturing, while direct material encompasses the raw materials used in the production process. Variable costs typically change with production volume and include costs like raw materials that increase as more units are produced. Therefore, the characteristics of depreciation and utilities align them with fixed overhead, confirming that your selection is correct.