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

Kaveri Textiles Ltd. is reviewing its cost records. The cost of rent of the factory building, which stays the same in total whether production is 5,000 or 9,000 metres in a month, is best described as:

Factory rent is a fixed cost in total because it stays the same across the stated output range, while its cost per unit falls as production rises since the same amount is spread over more units. It is not variable, semi-variable or step cost.

  1. AA variable cost, because it relates to production
  2. BA fixed cost in total, whose per-unit amount falls as output risesCorrect
  3. CA semi-variable cost, because it is paid monthly
  4. DA step cost, because it changes every month

Explanation

Factory rent does not change in total within the relevant range of output, so it is a fixed cost. Because the same total is spread over more units, the cost per metre decreases as output rises. Calling it variable confuses the behaviour of total cost with its link to production.

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