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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Tessellate Ltd, a software support company, pays a call-centre contractor $12,000 per month for up to 4,000 calls. Above 4,000 calls, a further $12,000 is payable for each extra block of up to 4,000 calls. Monthly volumes range between 3,000 and 7,500 calls. How should the contractor cost be classified for budgeting in this range?

It is a step fixed cost. The charge remains constant within each block of 4,000 calls and then jumps by $12,000 when volume moves into the next block, so it is neither purely fixed nor variable at a constant rate per call.

  1. AStep fixed costCorrect
  2. BVariable cost at $3 per call
  3. CSemi-variable cost with a fixed element and a constant variable rate
  4. DPurely fixed cost

Explanation

The cost stays constant within a band of activity and then jumps by a fixed amount when the band is exceeded: $12,000 up to 4,000 calls and $24,000 from 4,001 to 8,000. This is a step fixed cost. It is not semi-variable because there is no constant rate per call, and it is not purely fixed because it changes across the range.

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