Stepped costs change in steps with activity levels

Steps:

• Define stepped cost as a semi-fixed expense that remains constant within activity bands but jumps discretely when capacity thresholds are exceeded.
• Evaluate options: direct labour and materials vary continuously with output; factory rent stays fixed until space needs increase; telephone costs fluctuate with usage.
• Identify factory rent as fitting the stepped pattern, e.g., adding factory space at production jumps.
• Confirm by excluding truly variable or purely fixed costs without steps.

Why C is correct:

• Factory rent is a stepped cost per cost accounting definitions, remaining fixed within production capacity ranges but increasing in discrete amounts when additional facilities are required.

Why the others are wrong:

• A. Direct labour varies proportionally with production volume, making it a variable cost.
• B. Direct materials change directly with output quantity, classifying as variable.
• D. Telephone expenses typically vary with call volume, behaving as variable or semi-variable.

Final answer: C