Question

Which of the following statements is true for a firm that uses "direct" (variable) costing?

Product costs include "direct" (variable) administrative costs.

Profits fluctuate with sales.

An idle facility variation is calculated by a direct cost system.

The cost of a unit changes because of changes in number of units manufactured.

Answer 1

Profits fluctuate with sales is true for a firm that uses "direct" (variable) costing.

Profits under direct (variable) costing are dependent on units sold. Higher the sales, higher the profit. Lower the sales. Lower the profit.

Product costs include only Direct materials, direct labor, and variable manufacturing overhead costs under variable costing.

Fixed manufacturing overhead costs are treated as period costs under variable costing so profit does not change with changes in number of units manufactured.

Option B is correct