Which of the following is not a variable cost of production ?

Question

Accepted Answer

The correct option is 3:
Variable costs are expenses that change directly and proportionally with the level of output or production. Fixed costs, in contrast, are expenses that remain constant regardless of the production level in the short run. The insurance premium of a building is a fixed cost because the company must pay this premium whether it produces zero units or maximum capacity units. This cost is tied to the existence of the fixed asset (the building) and not the activity level of the firm.

The incorrect option is 1:
Purchase of raw material is a classic example of a variable cost. If production stops, no raw materials are purchased. If production doubles, the expenditure on raw materials must also increase substantially.

The incorrect option is 2:
Wages paid to casual labour are generally considered a variable cost because casual laborers are hired based on production needs. If the firm produces more, it hires more casual labor, and if production falls, the number of casual laborers is reduced, leading to a direct change in the wage expense.

The incorrect option is 4:
While machine maintenance can have a fixed component, costs directly related to wear and tear due to usage (which increases with output) are variable. In a general production context, a significant portion of maintenance costs scale up with higher production volume, making it predominantly a variable cost item.