Question

Assertion (A): In costing of processed foods, food cost is classified as variable cost. Reason (R): Variable cost changes in direct proportion to the production volume of processed foods, as they include raw materials that increase with the output.

• A. Both (A) and (R) are correct and (R) is the correct explanation of (A)
• B. Both (A) and (R) are correct but (R) is not the correct explanation of (A)
• C. (A) is correct but (R) is not correct
• D. (A) is not correct but (R) is correct

Hint:

Understanding the nature of costs, particularly variable costs, is crucial for effective financial management and pricing strategies in the food processing industry.

Answer 1

The Correct Option is A

Step 1: Concept
Variable costs are those that change directly with the level of production. In the context of processed foods, raw materials typically constitute a significant portion of these variable costs.

Step 2: Meaning
Food cost refers to the expenses incurred for purchasing ingredients and other raw materials used in food processing. Variable costs specifically refer to expenses that vary directly with the volume of output produced.

Step 3: Analysis
Assertion (A) states that food cost is classified as a variable cost in processed foods. This assertion is correct because, in most cases, the cost of raw materials increases or decreases based on the amount of food being produced. Reason (R) explains this by stating that variable costs change directly with production volume and includes raw materials which increase with output. Therefore, both the assertion and reason are correct, and the reason accurately explains why the assertion is true.

Step 4: Conclusion
The reasoning provided in (R) correctly supports the classification of food cost as a variable cost in processed foods. Final Answer: (A)