Question

Over the short term, which type of costs is indifferent to activity level changes?

Select one:

A. Mixed costs

B. Variable costs

C. Step costs

D. Fixed costs

Answer 1

The correct answer is D. Fixed costs.
Over the short term, the fixed cost remains indifferent to the activity level changes.
Fixed costs are those costs which do not change in accordance with the increase or decrease in the level of production. These costs are incurred even if there is no production activities. Eg:- factory rent is a fixed cost because the rent should be paid even if there is no production or more production. Atleast in the short run these costs will not vary. Total fixed costs will remain unchanged regardless the change in the level of activity. The level of fixed costs varies in accordance with the style and type of business. For big manufacturing concerns, the fixed costs will be higher and for small service providing business, it will be very lower. But, whatever is the level of business activity or productivity the fixed costs will remain the same.
Mixed costs are combination of both fixed costs and variable costs. In mixed costs, the fixed costs will remain constant whereas the variable costs will change in accordance with change in output.
Variable costs are those which change in accordance with the level of activity. When the production increases, variable costs will increase. When production decreases, it will decrease.
Step costs are those costs which will remain constant for a given level of activity, but will change after reaching its threshold.