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

Sundaram Textiles Ltd. notes that its dyeing department's monthly electricity bill is Rs 40,000 whether it dyes 1,000 metres or 4,000 metres of cloth. Within this range of activity, how is this cost best classified by behaviour?

The electricity bill is a fixed cost because the total amount stays at Rs 40,000 regardless of output between 1,000 and 4,000 metres. Variable costs change with activity, and semi-variable or step costs would show some movement, which the data does not show.

  1. AVariable cost
  2. BFixed costCorrect
  3. CSemi-variable cost
  4. DStep cost

Explanation

The bill does not change with output within the relevant range of 1,000 to 4,000 metres, so it is a fixed cost in total. A variable cost would change in direct proportion to output. A semi-variable cost has both a fixed and a changing element, which is not the case here.

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