Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What leads to an increase in the average variable cost curve?

1. Economies of scale

2. Increased production efficiency

3. Diseconomies of scale

4. Reduction in fixed costs

The correct answer is: Diseconomies of scale

An increase in the average variable cost curve is attributed to the presence of diseconomies of scale. Diseconomies of scale occur when a company grows beyond an efficient size, causing per unit costs to rise as production increases. This can be due to several factors, including inefficiencies in management, increased complexity, or resource constraints that lead to higher costs for producing an additional unit of output. As production intensity goes up, the costs associated with variable inputs, such as labor and materials, also tend to increase when diseconomies of scale are in effect. For example, if a factory becomes too large, orchestrating operations and managing employee tasks may become unwieldy, leading to increases in wage demands or overtime payments, thereby raising the average variable costs. The other options reflect scenarios that typically lead to a decrease or stabilization in costs rather than an increase. Even reducing fixed costs does not directly impact average variable costs, as average variable cost is concerned with the variable expenses incurred in production rather than fixed ones.