Question

Which of the following costs are included in the cost classification that is based on the relationship between total cost and volume of activity?

A. Variable cost and fixed cost.
B. Direct cost and indirect cost.
C. Product cost and period cost.
D. Committed cost and discretionary cost.

Answer 1

Variable cost and fixed cost are the costs included in the cost classification based on the relationship between total cost and volume of activity.

Step-by-step explanation:

The cost classification based on the relationship between total cost and volume of activity includes variable costs and fixed costs. Variable costs change with the level of production activity, such as the costs of raw materials or labor directly tied to the creation of a product or service. In contrast, fixed costs remain constant regardless of the production volume, like rent for a factory or retail space that does not change even if your production levels vary. Examples can be seen in economic models where the total cost is graphically represented as the sum of both fixed and variable costs, with fixed costs depicted as the vertical intercept of the total cost curve.