A leased factory building has a fixed monthly rental payment, and a variable overhead cost of energy and indirect labour.Which of the following is TRUE, assuming that all activity levels are within the relevant range?
A)Variable OVH costs will increase as production increases, but Fixed OVH costs will decrease.
B)Variable OVH costs will decrease as production increases, but Fixed OVH costs will increase.
C)Variable OVH costs will increase as production increases, and Fixed OVH costs will increase.
D)Variable OVH costs will increase as production increases, but Fixed OVH costs will remain constant.
E)Both will increase with production, but at different rates.

Question

Quizplus · Accepted Answer

Fixed overhead costs do not vary with the level of production, so they will remain constant regardless of the activity level. Variable overhead costs, on the other hand, will increase as production increases because more energy and indirect labor will be required to produce more units. Therefore, the statement "Variable OVH costs will increase as production increases, but Fixed OVH costs will remain constant" is true.

A Leased Factory Building Has a Fixed Monthly Rental Payment