A composite cost unit is used when:

• A. A single cost unit would be appropriate
• B. When more than one factor influences cost
• C. When costs are fixed
• D. When only one product is made

Answer: (B)

A composite cost unit is used when the cost of a product or service is driven by more than one factor. When multiple cost drivers influence total cost—for example, both labour time and machine time, or setup complexity and processing time—it’s helpful to combine these drivers into a single measuring unit. This allows overhead and other shared costs to be allocated more accurately, reflecting the actual mix of resources used.

If only one driver truly determines cost, a simple unit cost per product would be sufficient, so a composite unit isn’t needed. Costs being fixed or there being only one product don’t by themselves require a composite unit—the key idea is the presence of multiple influencing factors.