Multiple Choice
Which of the following is included in the cost of constructing a building?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Cost behavior is considered linear whenever:
A
Total costs change in direct proportion to changes in activity level.
B
Total costs remain constant regardless of activity level.
C
Variable cost per unit increases as production increases.
D
Fixed costs increase as activity level increases.
Verified step by step guidance1
Understand the concept of cost behavior: Cost behavior refers to how costs change in response to changes in activity levels. It is important to distinguish between fixed costs, variable costs, and mixed costs.
Review the definition of linear cost behavior: Linear cost behavior implies that total costs change in direct proportion to changes in the activity level. This means that variable costs per unit remain constant, and fixed costs do not change with activity level.
Analyze the options provided: Evaluate each statement to determine whether it aligns with the definition of linear cost behavior. For example, 'Total costs change in direct proportion to changes in activity level' matches the definition, while 'Total costs remain constant regardless of activity level' does not.
Eliminate incorrect options: For instance, 'Variable cost per unit increases as production increases' contradicts the concept of linear cost behavior, as variable cost per unit should remain constant. Similarly, 'Fixed costs increase as activity level increases' is incorrect because fixed costs do not vary with activity level.
Select the correct answer: Based on the analysis, choose the option that accurately reflects the definition of linear cost behavior, which is 'Total costs change in direct proportion to changes in activity level.'
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