What distinguishes fixed costs from variable costs?

What distinguishes fixed costs from variable costs?

• A. Fixed costs change with activity level, while variable costs remain constant
• B. Variable costs are incurred only on a seasonal basis
• C. Fixed costs remain constant regardless of the activity level
• D. Variable costs are predictable over time

Answer: (C)

Fixed costs are characterized by their consistency, remaining unchanged regardless of the level of production or activity within a certain range. This means that whether a company produces one unit or thousands of units, fixed costs, such as rent for a manufacturing facility or salaries of employees not tied to production levels, will not fluctuate. This stability allows businesses to plan their finances and budgets with greater certainty, knowing that these costs will not vary with production levels, at least over the relevant range of activity. In contrast, variable costs fluctuate directly with the level of production; as more units are produced, the total variable cost increases (for example, raw materials or direct labor costs related to production). The distinction plays a crucial role in managerial accounting, as understanding how costs behave with changes in activity allows managers to make informed decisions about pricing, budgeting, and forecasting. While the other options discuss aspects of costs, they do not accurately capture the core distinction between fixed and variable costs.

Fixed costs are characterized by their consistency, remaining unchanged regardless of the level of production or activity within a certain range. This means that whether a company produces one unit or thousands of units, fixed costs, such as rent for a manufacturing facility or salaries of employees not tied to production levels, will not fluctuate. This stability allows businesses to plan their finances and budgets with greater certainty, knowing that these costs will not vary with production levels, at least over the relevant range of activity.

In contrast, variable costs fluctuate directly with the level of production; as more units are produced, the total variable cost increases (for example, raw materials or direct labor costs related to production). The distinction plays a crucial role in managerial accounting, as understanding how costs behave with changes in activity allows managers to make informed decisions about pricing, budgeting, and forecasting.

While the other options discuss aspects of costs, they do not accurately capture the core distinction between fixed and variable costs.