Please select correct answer and provide explanation why it\'s correct and why t

Question

Please select correct answer and provide explanation why it's correct and why the other answers are wrong. Please BE SPECIFIC. Thanks

1. Which of the following is not correct when discussing traceability of costs?

Direct costs can be traced directly to a department, product, or service.

Indirect costs cannot be traced directly to a department, product, or service.

Variable costs are any costs that change from year to year.

Full costs include both direct and indirect costs.

Average costs are full costs that are divided by products or services.

Explanation / Answer

(i) Direct costs can be traced directly to a department, product or service.

This statement is correct. If expenditure can be allocated to a cost department or cost object in an economically feasible way then it is called direct otherwise the cost component will be termed as indirect

(ii) Indirect costs cannot be traced directly to a department, product or service.

This statement is correct. Indirect costs are incurred for the factory as a whole. It cannot be specifically identified with a particular product, service or department. For example, factory rent cannot be allocated to a particular product only.

(iii) Variable costs are any costs that change from year to year.

This statement is incorrect. Variable costs are those costs which vary directly with the volume of output. As the level of output rises, total variable cost also rises and vice versa. Variable cost has no concern with time period.

(iv) Full costs include both direct costs and indirect costs.

This statement is correct. Full cost means total cost of a product. It is composed of both direct costs and indirect costs.

(v) Average costs are full costs that are divided by products or service.

This statement is correct. Average cost is calculated by dividing the total full cost by the number of units produced.

Average cost = Total full cost/Number of units of product

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