Management accounting: Cost management: Part 1: Measurement concepts: a) Cost behavior

Question 1

Relevant range:

Answer 1

1- The period of time where cost is classified & being observed to understand its behavior.
2- The range of activity (production/sale) over which those relationships are valid.
3- Range of activity that the company typically operates in.

Question 2

When do the variable and fixed costs rules apply?

Answer 2

It applies only within the relevant range.

Question 3

Fixed and variable are constrained by…

Answer 3

The relevant range

Question 4

What is the fixed cost?

Answer 4

The portion of total costs that do not change when a quantity of a cost driver changes over a relevant range and duration

Question 5

Why is the duration important in the relevant range?

Answer 5

Because fixed cost may be constant one year & at a constant but higher level the next year.

Question 6

why would fixed cost become less significant?

Answer 6

Because when its measured on a per unit basis and it quantity increases, its value will decline

Question 7

What do you need to understand to classify a cost?

Answer 7

You need to understand its behavior over a specific period of time “relevant range”.

Question 8

What is the fixed cost formula?

Answer 8

= Total cost of production - (variable cost per unit * No. of unit produced.

Question 9

Fixed cost can be classified as…

Answer 9

1- Discretionary costs
2- Committed costs

Question 10

What is the Discretionary costs?

Answer 10

known as managed/budgeted fixed costs, a company can survive without it.

Question 11

When is discretionary cost is included or excluded?

Answer 11

Can be included or excluded from the budget at the discretion of the manager

Question 12

Examples of discretionary cost are…

Answer 12

Advertising, Internships, Training, Indirect manufacturing labor, and selling & administrative labor.

Question 13

What is the committed costs?

Answer 13

• Costs that can not be omitted due to strategic or operational priorities in the short run. It tends to be facilities related and result from prior capacity related decisions.
• Is an investment that a business entity has already made and cannot be recover by means as well as obligations already made that the business cannot get out of.

Question 14

Example on the committed cost are…

Answer 14

Depreciation on equipment previously purchased.

Question 15

Examples on indirect fixed costs are…

Answer 15

Depreciation, Taxes, Lease costs, Employees paid on salary, Insurance

Question 16

Notes on fixed cost are…

Answer 16

• a fixed cost will remain the same over a relevant range.
• Change any quantity by a large enough degree and the fixed cost will no longer remain fixed.
• change the quantity to zero and the and typically all fixed costs will end.
• Change the quantity above a certain level and new plants or other capacity must be added.
• It’s cost that remain constant on a total basis.
• Decrease proportionally to output, increase on a per-unit basis.