Chapter 21, Problem 10DQ

To determine

Cost behavior analysis : Cost behavior analysis means to study how the cost changes as the level of volume changes. Sometimes it may be fixed, it may be variable, it may be constant at certain level etc.

Variable Cost: A variable cost is the cost that changes at each level and volume of activity changes. It never remains fixed in totality. It increases at consistent rate on per unit basis as the level of output increases and vice versa. Each variable cost is having cost driver such as per hour or per unit.

Fixed Cost: A Fixed cost is a cost which remains same in totality with the change in activity level. It never remains fixed per unit. It remains fixed even at zero level of activity. Most fixed costs are expressed in terms of time such as per year or per month. It is having no cost driver.

To determine:

If we classify the cost as fixed or variable then there will be possibility that each cost incurred on individual basis may not behave as per their classification

In the given question we have to explain that why we need to classify all the costs either as fixed cost or as variable cost even if the cost classified may not behave as per its classification. We have to justify the same with two arguments.