The Concept of Step Cost:

Step cost refers to the cost which remains fixed over a certain range of output, but suddenly jumps to a new higher level when production goes beyond a given limit. It is also called a staircase cost or a step-fixed cost.

Examples of Step Cost:

There are various examples of step cost, some of them are:

- Rent: Suppose a company is renting a space for its production. The rent for the space is fixed for a certain range of output, but if the production goes beyond a certain limit, then the company has to rent additional space, which will increase its rent cost.
- Labor: If a company is producing a certain number of units of a product, then it requires a fixed number of laborers. But if the production goes beyond a certain limit, then the company has to hire additional laborers, which will increase its labor cost.
- Equipment: Suppose a company is using a machine to produce a certain number of units of a product. The cost of using the machine is fixed for a certain range of output, but if the production goes beyond a certain limit, then the company has to use an additional machine, which will increase its equipment cost.

Impact of Step Cost on Profit:

Step cost can have a significant impact on a company's profit. When a company reaches the limit of its production capacity, its fixed costs suddenly increase, which reduces its profit margin. Therefore, it is essential for a company to carefully analyze its production capacity and fixed costs to ensure that it does not exceed its capacity and incur unnecessary costs.

Conclusion:

Step cost is an important concept in cost accounting, which refers to the cost that remains fixed over a certain range of output but suddenly jumps to a new higher level when production goes beyond a given limit. It is important for a company to carefully analyze its production capacity and fixed costs to avoid incurring unnecessary costs and to ensure profitability.

Variable cost