When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?
A) General and administrative costs are assumed to be variable costs.
B) Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.
C) Total costs are assumed to be linear when plotted on a graph.
D) The relevant time period is assumed to be five years.

Question

Quizplus · Accepted Answer

One of the basic assumptions of cost behavior is that a cost can be approximated by a linear cost function within the relevant range. A linear cost function is one in which the graph of total costs vs. the level of activity is a straight line.

When Identifying Fixed and Variable Costs, Which One of the Following