Stepped costs change in steps with activity levels

Steps:

• Define stepped cost as a semi-fixed expense constant over activity ranges but jumping at thresholds like capacity limits.
• Evaluate options: direct labour and materials vary continuously with output; rent and telephone may have fixed elements but differ in stepping behavior.
• Identify factory rent as stepping when business expands space needs.
• Confirm telephone is more semi-variable without clear steps.

Why C is correct:

• Factory rent is a stepped cost per cost accounting definitions, remaining fixed until production volume requires additional factory space, causing abrupt increases.

Why the others are wrong:

• A. Direct labour varies proportionally with production units, making it a variable cost.
• B. Direct materials fluctuate directly with output quantity, classifying as variable.
• D. Telephone expenses are typically semi-variable, changing gradually with usage rather than in discrete steps.

Final answer: C