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

Rohan Engineering pays its supervisor a monthly salary of Rs 30,000 for up to 4,000 machine hours. Beyond 4,000 hours another supervisor is needed, raising the salary cost by Rs 30,000 for each further block of up to 4,000 hours. Machine hours in a month are 6,500. What is the supervision cost for the month and its nature?

The cost is Rs 60,000 and it is a step cost. Output of 6,500 hours exceeds the first 4,000-hour block, so a second supervisor is required. The cost remains constant within a range and rises in jumps, which defines a step cost.

  1. ARs 30,000, fixed cost
  2. BRs 60,000, step costCorrect
  3. CRs 48,750, variable cost
  4. DRs 60,000, semi-variable cost

Explanation

6,500 hours exceeds the first block of 4,000 hours, so a second supervisor is needed: 30,000 + 30,000 = Rs 60,000. The cost stays constant within a range and jumps at thresholds, which is a step cost. Semi-variable cost has a fixed element plus a variable element that moves with activity, which is not the case here.

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