CSLB Law & Business ExamBusiness FinancesMedium
A contractor leases a mini-excavator for $1,500 per month. This cost remains constant regardless of how many hours the excavator is used within a month. For job costing purposes, how should this excavator lease payment be classified?
- ASemi-variable Cost
- BDirect Cost
- CFixed Cost
- DVariable Cost
Show answer & explanationAnswer & explanation
Correct answer: C. Fixed Cost
A fixed cost is a cost that does not change in total, regardless of changes in the level of activity (e.g., production volume or hours of use) within a relevant range. The excavator lease payment, being constant monthly, fits this definition.
Why the other options are wrong
- A. Semi-variable costs have both fixed and variable components, which is not described here.
- B. Direct costs are directly attributable to a specific job; while it might be allocated, its nature is fixed.
- D. Variable costs change in total with the level of activity; this cost is constant.
Fixed Cost
A cost that does not change in total as the level of activity (e.g., production, sales, or hours of equipment use) increases or decreases within a relevant range.
- Examples include rent, insurance, and salaries of administrative staff.
- Per unit fixed cost decreases as activity increases.
- Important for break-even analysis and budgeting.
Memory trick: Fixed stays flat, Variable varies.