Question

What are the two ways in which financial accountants usually classify costs?

a. variable costs
b. period costs
c. product costs
d. fixed costs

Answer 1

Financial accountants classify costs into fixed and variable costs. Fixed costs, like rent, are constant regardless of production level, while variable costs fluctuate with production levels and have diminishing marginal returns.

Step-by-step explanation:

Financial accountants usually classify costs into two categories: fixed costs and variable costs. Fixed costs are associated with fixed inputs, like capital, which do not change in the short run, making these costs constant regardless of the level of production. For instance, the rent on a factory is a fixed cost because it remains the same whether a lot is produced or very little. Variable costs, however, fluctuate with production levels. These costs are incurred during the production process and show diminishing marginal returns, which means that the marginal cost of producing additional output increases.