Multiple Choice
Which of the following best describes the general rule for cost inclusion for plant assets?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which type of cost remains unchanged when the volume of activity changes within the relevant range?
A
Variable cost
B
Fixed cost
C
Direct material cost
D
Mixed cost
Verified step by step guidance1
Understand the concept of 'relevant range': The relevant range refers to the range of activity within which assumptions about cost behavior are valid. Costs may behave differently outside this range.
Define fixed costs: Fixed costs are expenses that do not change with the level of activity or production within the relevant range. Examples include rent, salaries, and insurance.
Contrast fixed costs with variable costs: Variable costs change directly with the level of activity or production. Examples include direct materials and direct labor costs.
Explain mixed costs: Mixed costs contain both fixed and variable components. For example, a utility bill may have a fixed base charge plus a variable charge based on usage.
Conclude that fixed costs remain unchanged within the relevant range, regardless of the volume of activity, making them the correct answer to the question.
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