Which of the following best describes fixed costs?

Which of the following best describes fixed costs?

• A. Costs that change with production levels
• B. Costs that remain constant in total regardless of activity level
• C. Costs that are incurred only during peak production
• D. Costs that vary seasonally

Answer: (B)

Fixed costs are defined as expenses that do not change in total regardless of the level of activity or production within a relevant range. This means that whether a company produces 1 unit or 1,000 units, the total fixed costs remain the same. Examples of fixed costs include rent, salaries of permanent staff, and insurance, all of which must be paid regardless of production output. In contrast, other options describe different characteristics of costs. Some costs fluctuate with levels of activity, such as variable costs, which change directly in proportion to the volume of production. Other choices imply specific conditions or variations like being incurred only during peak production or changing with the seasons, which do not apply to fixed costs. Understanding that fixed costs are unaffected by production levels is crucial in management accounting, as it helps businesses in budgeting, forecasting, and decision-making processes.

Fixed costs are defined as expenses that do not change in total regardless of the level of activity or production within a relevant range. This means that whether a company produces 1 unit or 1,000 units, the total fixed costs remain the same. Examples of fixed costs include rent, salaries of permanent staff, and insurance, all of which must be paid regardless of production output.

In contrast, other options describe different characteristics of costs. Some costs fluctuate with levels of activity, such as variable costs, which change directly in proportion to the volume of production. Other choices imply specific conditions or variations like being incurred only during peak production or changing with the seasons, which do not apply to fixed costs. Understanding that fixed costs are unaffected by production levels is crucial in management accounting, as it helps businesses in budgeting, forecasting, and decision-making processes.