Chapter 3

Question 1

What are the four kinds of cost?

Answer 1

1) Variable Cost
2) Fixed Cost
3) Stepped Fixed Cost
4) Semi Variable Cost

Question 2

What is a variable cost?

Answer 2

• A cost which tends to vary, in total, with the level of activity.

-The more that is produced, the higher the total cost.

-In this exam, it is assumed that unit costs remain constant regardless of the level of production

Question 3

What are examples of variable cost?

Answer 3

Direct Costs
Machine running costs

Question 4

Variable cost graphs

Answer 4

Total Cost ($) vs Level of Activity
- x=y

Cost/unit ($) vs Level of Activity

y = c

Question 5

What is a Fixed Cost?

Answer 5

This cost is incurred for a period, and, within certain output and turnover limits, tends to be unaffected by fluctuations in the levels of activity (output or turnover)

A cost that is fixed in the short term may become variable in the longer term

Question 6

What are examples of fixed cost?

Answer 6

Rent, rates

Question 7

Fixed cost graphs

Answer 7

Total cost ($) vs Level of activity
y = c

Cost/unit ($) vs Level of activity
y=c/x

Question 8

What is a stepped fixed cost

Answer 8

A cost which is fixed for a particular range of activity levels, but once the upper limit of that range is passed a new higher level of fixed cost is incurred

Question 9

What are examples of stepped fixed cost

Answer 9

Factory rent, supervisors salaries

Question 10

Stepped Fixed cost graphs

Answer 10

cost ($) vs Level of activity

looks like steps

Question 11

What is a semi-variable cost

Answer 11

A cost containing both fixed and variable components and which is thus partly affected by fluctuations in the level of activity

Question 12

What are examples of semi-variable cost

Answer 12

Electricity cost, telephone bill

Question 13

Semi-variable cost graphs

Answer 13

total cost ($) vs Level of activity
y= mx +c

cost/unit ($) vs level of activity
y = c/x - c

Question 14

What is a high/low method