Texas FFA Nursery Landscape Practice Exam

What type of costs do Joe's Landscaping's rent, legal fees, utilities, and insurance classify as?

1. Variable costs

2. Contingency costs

3. Overhead costs

4. Marginal costs

The correct answer is: Overhead costs

The costs related to Joe's Landscaping, such as rent, legal fees, utilities, and insurance, are categorized as overhead costs. Overhead costs, also known as indirect costs, are expenses that are not directly tied to the production of goods or services but are necessary for the overall functioning of a business. These costs support the operational activities required to run the business regardless of the volume of services provided. In contrast, variable costs fluctuate with the level of production or service delivery, meaning they increase as business activity increases and decrease when activity decreases. Contingency costs are typically set aside for unexpected events or emergencies rather than regular operational expenses. Marginal costs refer to the cost of producing one additional unit of a product or service and are more closely related to decisions about production volume rather than to general business expenses. Therefore, the classification of Joe's Landscaping's rent, legal fees, utilities, and insurance as overhead costs is appropriate given their role in maintaining the business infrastructure.