CPIM Practice Exam

Which of the following best describes fixed overhead costs?

1. Costs that fluctuate with production levels

2. Costs that are incurred only when products are produced

3. All manufacturing costs excluding direct labor and direct materials

4. Costs associated with selling and administrative expenses

The correct answer is: All manufacturing costs excluding direct labor and direct materials

Fixed overhead costs are best described as all manufacturing costs excluding direct labor and direct materials. This encompasses a variety of expenses that do not change with the level of production. Fixed overhead includes costs such as rent or lease payments for manufacturing facilities, salaries of production supervisors, property taxes, and insurance for production facilities. These costs remain constant regardless of how many units are produced, making them "fixed" as opposed to variable costs, which fluctuate with production levels. Other choices provide misleading or incomplete definitions. Costs that fluctuate with production levels pertain to variable costs rather than fixed costs. Costs incurred only when products are produced would refer to variable costs, as fixed costs are incurred even when production activities are not taking place. Selling and administrative expenses fall outside the scope of manufacturing costs, making that choice incorrect as it focuses on a different category of expenses. Understanding the nature of fixed overhead costs is essential for budgeting and cost management in manufacturing.