Costs ICSE Class 10: Fixed, Variable, Semi-variable, Direct and Indirect

What Costs is about

Weightage: CISCE publishes no chapter weightage. Section A (40 marks) is compulsory, with 1-mark MCQs and short 2-mark answers; in Section B you answer any four of six 10-mark questions.Source: CISCE ICSE Commercial Studies (631) specimen paper structure, 2025, retained for 2027 by the CISCE circular of 9 October 2026

Key concepts

Fundamental concept of cost

Cost is the total of all expenses incurred, measured in money, to produce a product or render a service, or to carry on an activity. It includes the cost of materials, labour and other expenses (overheads).

Cost is always related to something, called a cost object or cost unit: the cost of a chair, the cost per kilometre of a bus, the cost of running a department. Knowing costs helps a firm fix prices, control waste, prepare budgets, decide whether to make or buy, and find profit per product.

Total cost = Fixed cost + Variable cost (with semi-variable costs split into their fixed and variable parts).

Worked example

(2 marks) What is meant by cost? Why does a business need to know its costs?

Try it first, then show the solutionSolution

1. Cost: total expenses in money incurred to produce a good or provide a service - 1 mark.
2. Use: to fix prices, control expenses and find profit - 1 mark.

Answer: Cost is the money value of all the resources (materials, labour and other expenses) used to produce a good or provide a service. A business needs it to fix selling prices, control waste and find the profit on each product.

Fixed cost

Fixed costs are costs that remain the same in total whatever the level of output, within a given capacity and period. They are incurred even when production is zero. Because the total stays fixed, the fixed cost per unit falls as output rises.

Examples: rent of the factory building, salaries of permanent staff (managers, clerks), insurance premium, property tax, interest on loans, depreciation on a straight-line basis, licence fees.

Note: fixed costs are fixed only within a range; if the firm doubles its capacity by renting a second building, rent rises to a new fixed level.

Worked example

(2 marks) Factory rent is ₹60,000 a month. Find the rent per unit at outputs of 1,000 and 3,000 units.

Try it first, then show the solutionSolution

1. At 1,000 units: ₹60,000 ÷ 1,000 = ₹60 per unit - 1 mark.
2. At 3,000 units: ₹60,000 ÷ 3,000 = ₹20 per unit; total unchanged, per unit falls - 1 mark.

Answer: ₹60 per unit at 1,000 units and ₹20 per unit at 3,000 units: total fixed cost stays at ₹60,000 while the cost per unit falls.

Variable cost

Variable costs are costs that change in total in direct proportion to the volume of output: if output doubles, the total variable cost doubles; if output is zero, it is zero. The variable cost per unit stays the same.

Examples: raw materials used in making the product, wages paid per piece produced, packing materials, power used by production machines, sales commission paid per unit sold, carriage on goods sold.

Caution: a variable cost is not a price that 'varies' from day to day, like vegetable prices; it is a cost whose total varies with output.

Worked example

(2 marks) What is variable cost? Give one example.

Try it first, then show the solutionSolution

1. Cost whose total changes in direct proportion to output; nil at zero output - 1 mark.
2. Example: raw material used in production - 1 mark.

Answer: Variable cost is a cost whose total changes in direct proportion to the volume of output, being nil when nothing is produced; for example, the cost of cloth used to make shirts.

Semi-variable cost

Semi-variable (mixed) costs are partly fixed and partly variable. A fixed minimum is paid even at zero output, and the rest rises with output, though not in direct proportion overall.

Examples: telephone bill (fixed monthly rental plus charges for calls or data beyond the plan), electricity bill (fixed connection charge plus charge per unit used), repairs and maintenance of machines, salary of a salesman paid as a fixed salary plus commission, depreciation of machinery used more in busy periods.

Total semi-variable cost = Fixed part + (Variable rate × Output).

Worked example

(2 marks) A firm's electricity bill has a fixed charge of ₹2,000 a month plus ₹5 per unit of output. Find the bill at 400 and 800 units.

Try it first, then show the solutionSolution

1. At 400 units: ₹2,000 + ₹5 × 400 = ₹4,000 - 1 mark.
2. At 800 units: ₹2,000 + ₹5 × 800 = ₹6,000; output doubles but the bill does not - 1 mark.

Answer: ₹4,000 at 400 units and ₹6,000 at 800 units; the bill rises with output but not in proportion, because of the fixed part: a semi-variable cost.

Direct cost

Direct costs are costs that can be identified with, and charged directly to, a particular product, job or process. They are traceable: you can say exactly how much was spent on that unit.

Types and examples: direct materials (wood used in making a table, cloth in a shirt); direct labour (wages of a carpenter who makes the table, paid for that job); direct expenses (hire of a special tool for one job, royalty per unit, cost of a special design for one order).

The total of direct costs is called prime cost.

Worked example

(1 mark) Which of these is a direct cost of making wooden chairs?
(a) Factory rent
(b) Wood used in the chairs
(c) Manager's salary
(d) Office electricity

Try it first, then show the solutionSolution

1. Only the wood can be traced to each chair.

Answer: (b) Wood used in the chairs.

Indirect cost and direct vs indirect

Indirect costs (overheads) are costs that cannot be identified with a particular product or job, because they are incurred for the business as a whole or shared by several products. They are charged to products by apportionment (sharing) on some fair basis.

Examples: factory rent, supervisor's salary, lighting of the factory, lubricating oil for machines, depreciation of the factory building, office salaries, advertisement, insurance of the factory.

Differences: (1) Traceability: direct costs are traced to a specific product; indirect costs are not. (2) Charging: direct costs are charged directly; indirect costs are apportioned. (3) Measurement: direct costs per unit are measured exactly; indirect costs per unit are estimates. (4) Grouping: direct costs make up prime cost; indirect costs are overheads. (5) Examples: raw material and job wages vs rent, supervision and lighting.

Worked example

(2 marks) Write any two differences between direct cost and indirect cost.

Try it first, then show the solutionSolution

1. Traceability: direct costs can be traced to a particular product, e.g. raw material; indirect cannot, e.g. factory rent - 1 mark.
2. Charging: direct costs are charged directly; indirect costs are shared among products on a suitable basis - 1 mark.

Answer: (1) A direct cost can be identified with a particular product, such as the leather used in a pair of shoes, whereas an indirect cost cannot, such as factory rent. (2) Direct costs are charged straight to the product, whereas indirect costs are apportioned among products on a suitable basis.

Costs in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Fixed, Variable and Semi-variable Costs

Costs: key facts

Total cost

Total cost = Fixed cost + Variable cost

Split semi-variable costs into fixed and variable parts.

Fixed cost per unit

Fixed cost per unit = Total fixed cost ÷ Output

Falls as output rises.

Variable cost

Total variable cost = Variable cost per unit × Output

Per unit stays the same.

Semi-variable cost

Fixed part + (Variable rate × Output)

Telephone, electricity, repairs.

Prime cost

Direct materials + Direct labour + Direct expenses

Indirect costs = overheads.

How the board asks Costs

The question patterns to expect, and the method that works for each.

Tricks to remember Costs

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Zero test

  At zero output: fixed cost is still there, variable cost is zero, semi-variable is the fixed part only.

  Use it when: Classify by behaviour.

• Point test

  Can you point at the product and say 'this much was spent on it'? Direct. If not, indirect.

  Use it when: Classify by nature.

Costs: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section B style)

Read the situation, then answer every part. In the board paper this is a 10-mark question split into 2 + 3 + 5 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Costs

The slips examiners see most often, and what to write instead.

• ✗Mistake: Treating changing market prices as variable cost

  The 2024 examiners reported candidates describing variable costs as fluctuating prices of fruit and vegetables.

  ✓Do this: Variable cost varies with output, not with time or market prices.

  Usually costs: Both marks.

• ✗Mistake: Giving a semi-variable example for variable cost

  The 2024 examiners reported candidates giving examples of semi-variable costs, such as telephone or electricity bills, as variable costs.

  ✓Do this: Bills with a fixed charge are semi-variable; give raw material or piece wages for variable.

  Usually costs: 1 mark.

• ✗Mistake: Answering by name only

  The 2025 examiners noted answers such as 'interest cost' with no explanation, and wrong examples.

  ✓Do this: Write the basis of difference and an example on each side.

  Usually costs: 1 mark per point.

• ✗Mistake: Saying fixed cost per unit is fixed

  Students confuse total and per unit.

  ✓Do this: Total fixed is constant; per unit falls. Total variable rises; per unit is constant.

  Usually costs: 1 mark.

Practice questions on Costs

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Which of these is a variable cost?
   (a) Rent of building
   (b) Raw material consumed
   (c) Manager's salary
   (d) Insurance

   Hint

   Rises with output.

   Answer

   (b) Raw material consumed.

2. Q2 · 1 mark · MCQBoard level

   Costs that cannot be traced to a particular product are called:
   (a) direct costs
   (b) prime costs
   (c) indirect costs
   (d) variable costs

   Hint

   Overheads.

   Answer

   (c) indirect costs.

3. Q3 · 2 marks · Very short answerBoard level

   What is semi-variable cost? Give two examples.

   Hint

   Part fixed, part variable.

   Answer

   A semi-variable cost has a fixed part payable even at zero output and a variable part that rises with output. Examples: telephone bill with fixed rental, and electricity bill with a fixed charge.

4. Q4 · 2 marks · Very short answerHarder board level

   Why is 'price of vegetables changing daily' not an example of variable cost?

   Hint

   Varies with what?

   Answer

   Variable cost means a cost whose total changes with the volume of output, not a price that changes over time. A daily change in market price is a price fluctuation, not a change caused by producing more or less.

5. Q5 · 2 marks · Very short answerHarder board level

   Is the salary of a factory supervisor direct or indirect, and fixed or variable? Explain.

   Hint

   Supervises everything.

   Answer

   It is indirect, because the supervisor oversees all products and his salary cannot be traced to one product, and fixed, because it is paid in full whatever the output.

6. Q6 · 2 marks · Short answerHOTS / competency

   Suppose total cost is ₹70,000 at 1,000 units and ₹1,00,000 at 2,000 units. Find the variable cost per unit and the fixed cost.

   Hint

   Change in cost ÷ change in units.

   Answer

   Variable cost per unit = (₹1,00,000 − ₹70,000) ÷ (2,000 − 1,000) = ₹30. Fixed cost = ₹70,000 − ₹30 × 1,000 = ₹40,000.

7. Q7 · 5 marks · Long answerBoard level

   Explain the classification of costs on the basis of behaviour with examples.

   Hint

   Three classes.

   Answer

   (1) Fixed costs stay the same in total whatever the output, such as rent and salaries; per unit they fall as output rises. (2) Variable costs change in total in direct proportion to output, such as raw material and piece wages; per unit they stay the same. (3) Semi-variable costs are partly fixed and partly variable, such as telephone and electricity bills with a fixed charge plus usage charges.

8. Q8 · 5 marks · Long answerHOTS / competency

   'During a slump a firm cannot escape its fixed costs.' Explain with reference to the classification of costs, and state one way the firm can reduce cost per unit.

   Hint

   Zero output still pays rent.

   Answer

   Fixed costs such as rent, salaries of permanent staff, insurance and interest must be paid even if output falls or stops, so in a slump they are spread over fewer units and the cost per unit rises sharply, squeezing profit. Variable costs, by contrast, fall with output. The firm can reduce cost per unit by raising output (e.g. finding new markets or orders), by renting out unused space, or by converting some fixed costs into variable ones, such as paying staff partly by commission.

9. Q9 · 2 marks · Very short answerHarder board level

   Give one example each of direct material, direct labour and direct expense for a printing press.

   Hint

   Traceable to one job.

   Answer

   Direct material: paper and ink used for a particular book. Direct labour: wages of operators for that job. Direct expense: hire of a special binding machine for that order.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Which cost is zero at zero output?Show answer

   Variable cost.

2. 2.Give one semi-variable cost.Show answer

   Telephone bill (rental plus call charges).

3. 3.What is prime cost?Show answer

   The total of direct materials, direct labour and direct expenses.

4. 4.Is factory rent direct or indirect?Show answer

   Indirect.

5. 5.What happens to fixed cost per unit when output rises?Show answer

   It falls.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Cost: money value of resources used to produce a good or service.
• ☐Fixed: same total (rent, salaries); per unit falls.
• ☐Variable: total in proportion to output (raw material, piece wages); per unit constant.
• ☐Semi-variable: fixed + variable parts (telephone, electricity).
• ☐Direct: traceable (material, job wages); indirect: overheads (rent, supervision).

Costs: frequently asked questions