Classifying Costs

Question 1

Fixed Costs

Answer 1

Costs that do not change in direct proportion with activity. For example, regardless of units produced or sold the company will still pay the same rent on its factory

Question 2

Variable Costs

Answer 2

Costs that vary in direct proportion to activity. For example, direct materials and direct labour will increase as output increases and decrease as output decreases

Question 3

Mixed (semi-variable) Costs

Answer 3

Costs that contain both a variable cost element and a fixed cost element. For example a telephone bill. The line rental is the fixed element and the number of calls is the variable element