Skip to content

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

Mehta Foods Ltd. pays its factory supervisor a monthly salary of Rs 40,000 for up to 5,000 labour hours. When activity exceeds 5,000 hours, a second supervisor must be hired at the same salary. At 4,000 hours, 5,500 hours and 9,500 hours of activity, the supervision cost is Rs 40,000, Rs 80,000 and Rs 80,000 respectively. This cost behaviour is best described as:

The supervision cost is a step cost. It remains constant over a range of activity and then jumps by a fixed amount when capacity is exceeded and another supervisor is needed. It is not semi-variable, because there is no continuous variable component.

  1. ASemi-variable cost
  2. BStep costCorrect
  3. CPurely variable cost
  4. DSunk cost

Explanation

The cost stays constant within a band of activity and jumps to a new level when the band is crossed, which is the pattern of a step (stepped fixed) cost. A semi-variable cost has a fixed element plus a variable element that changes continuously with activity, which does not happen here.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Cost and Management Accounting shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Cost and Management AccountingFree diagnostic mock

More Introduction to Cost and Management Accounting questions