Question

1) What type of costs rise and fall with the level of business activity?

2) If activity levels decline, how do fixed costs affect total unit costs?

3) What is the advantage of "assigning" costs to "cost objects"?

4) What defines an "indirect" cost?

Answer 1

1) Variable cost changes with the level of business activity. When activity rises, variable cost rises and when activity falls, variable cost also falls.

2) As fixed costs doesn't vary with the change in level of activity, rather it gets absorbed by the units in production, therefore when activity level rises, fixed cost per unit gets lower and when activity level falls, fixed cost per unit rises.

3) Assigning cost to cost objects gives us an accurate estimation about consumption of costs by different products or objects or activities.

4) Indirect costs are those costs which are not directly attributable to products or services, rather they're charged to products or services using some logical basis, like machine hours or direct labor hours.