A step fixed cost is a type of cost that is not altered along with the certain threshold of high and low activity within the business and is altered only when the thresholds are breached or crossed. When the threshold is breached due to certain change in the cost a new set of high and low threshold is then designed for that certain activity. A threshold can be breached due to two different conditions that can be explained as under:-
When the level of the activity declines from the certain threshold level the management of the business can take steps in order to terminate or reduce the associated fixed cost with that activity. For example if a certain production line is eliminated from the product mix of the business the management can decide to sell the production unit used to manufacture that eliminated in order to eliminate all the associated costs with that product line.
If the level of activity increases from the normal level the management has two options either to reject the increased level of activity and take no step to alter or increase step fixed cost. The other step is to accept the increased activity and decide to increase the incurring cost. For example if the sales orders increase from a certain limit the management can either reject these orders to maintain the same activity level or can install an additional production unit to increase activity and meet the demand of the increased orders.
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