Question

Telephone expenditure is

• A. Fixed
• B. Variable
• C. Semi-variable
• D. None of these

Hint:

To identify a semi-variable cost, look for expenses that have a minimum base charge plus additional charges based on usage. Other common examples include electricity bills (fixed meter charge + per-unit consumption charge) and vehicle maintenance costs (fixed insurance + variable fuel/repair costs).

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks to classify telephone expenditure based on its behavior with respect to the level of activity.
Step 2: Key Concept:
- Fixed Cost: A cost that remains constant in total regardless of the level of activity.
- Variable Cost: A cost that varies in total in direct proportion to the level of activity.
- Semi-variable Cost (or Mixed Cost): A cost that has both a fixed and a variable component. It remains fixed up to a certain level of activity and then becomes variable.
Step 3: Detailed Explanation:
A typical telephone bill consists of two parts:
1. A fixed rental charge: This amount has to be paid every month regardless of whether any calls are made. This is the fixed component.
2. Call charges: The amount charged based on the number and duration of calls made. This amount varies with the usage (level of activity). This is the variable component.
Since telephone expenditure contains both a fixed component (line rental) and a variable component (call charges), it is classified as a semi-variable cost.
Step 4: Final Answer
Telephone expenditure is a semi-variable cost because it includes both a fixed rental element and a variable usage-based element.