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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

Kaveri Textiles Ltd. is installing a costing system. Its management wants to separate costs into those that change in total with the level of activity and those that remain constant in total within a relevant range. Which classification of costs serves this purpose?

Classification of costs by behaviour into fixed, variable and semi-variable serves the purpose, because it shows how total cost responds to changes in activity level. Other classifications by nature, function or traceability describe what the cost is, where it arises or how it is attributed, not its activity response.

  1. ABy nature: material, labour and expenses
  2. BBy behaviour: fixed, variable and semi-variableCorrect
  3. CBy function: production, administration and selling
  4. DBy traceability: direct and indirect

Explanation

Classification by behaviour groups costs according to how they respond to changes in activity level. Fixed costs stay constant in total, variable costs change in total, and semi-variable costs have both elements. Classification by nature, function or traceability does not address response to activity.

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