Commercial Applications
What describes variable costs in terms of cost behaviour?
(1) They stay constant regardless of changes in activity. (2) They change proportionally with changes in activity levels. (3) They include both direct and indirect components. (4) They are fixed in nature.
- 1 & 2
- 3 & 4
- Only 1
- 2 & 3
Answer
2 & 3
Reason — Statement 2 is correct because variable costs change in the same proportion as the level of output — they vary directly with activity. Statement 3 is also correct because variable costs can include both direct components (like direct materials, direct labour) and indirect components (like power, fuel and other variable overheads). Statement 1 (constant regardless of activity) describes fixed costs, and Statement 4 (fixed in nature) is the opposite of variable.
Related Questions
Assertion (A): Fixed costs per unit remain constant as production volume increases.
Reason (R): Fixed costs are not dependent on the level of production.
Which of the following is correct?
- Both A and R are true, and R explains A.
- Both A and R are true, but R does not explain A.
- A is true, but R is false.
- A is false, but R is true.
Indirect costs can be directly traced to a specific cost object, such as a product or department.
- True
- False
Assertion (A): Opportunity costs are relevant in business decision making.
Reason (R): Opportunity cost reflects the value of the next best alternative foregone when a decision is made.
- A is true but R is false
- A is false but R is true
- Both A and R are true and R explains A.
- Both A and R are true but R does not explain A.
It refers to the expenses incurred on those items which are not directly chargeable to production. Salaries of timekeeper, foremen and watchmen are examples of this cost. This cost is incurred for the concern as a whole rather than a particular product.
- Direct cost
- Indirect cost
- Selling cost
- Advertising cost