Within the revelant range , variable costs can be expected to: A) remain constant in total as the activity level change. B) vary in total in direct proportion to changes in the activity level. C) increase on a per unit basis as the activity level decreases. D) increase on a per unit basis as the activity level increases.
The correct answer and explanation is:
Correct Answer: B) Vary in total in direct proportion to changes in the activity level.
Explanation:
Variable costs are costs that change in total in direct response to changes in the level of activity or volume of production. This is a foundational concept in cost accounting and managerial decision-making. These costs typically include items such as direct materials, direct labor (in some settings), and sales commissions.
Key Characteristics of Variable Costs:
- Total Variable Cost Changes with Activity:
- If the activity level (like units produced or services delivered) increases, total variable costs will increase proportionally.
- Conversely, if the activity level decreases, total variable costs will decrease proportionally.
- Per Unit Variable Cost Remains Constant:
- Even though total costs vary, the cost per unit stays the same within the relevant range.
- For example, if it costs $5 to produce one item, it will still cost $5 per item whether you produce 100 or 1,000 units.
Relevant Range:
The relevant range is the band of activity where assumptions about cost behavior remain valid. Outside of this range, cost behavior may change (e.g., due to bulk discounts or capacity limits), but within the relevant range, variable costs behave predictably.
Analysis of Options:
- A) Incorrect. Total variable costs do not remain constant; they change with activity level.
- B) ✅ Correct. Total variable costs change directly and proportionally with activity level.
- C) Incorrect. Variable costs per unit remain constant, not increase.
- D) Incorrect. Again, variable costs per unit do not change with activity level.
Summary:
Within the relevant range, total variable costs fluctuate in direct proportion to changes in activity levels, while per-unit variable costs remain constant. Thus, option B best reflects this behavior.