P1: 4.2 Cost Management Concepts

Question 1

Variable cost per unit

Answer 1

Remains constant in the short run regardless of level of production.

Question 2

Variable cost in total

Answer 2

• vary directly and proportional with changes in volume

Question 3

Fixed cost in total

Answer 3

• remain unchanged in the short run regardless of production level

Question 4

Fixed cost per unit

Answer 4

• varies directly with the activity level
• ex. While the fixed cost of the equipment remains unchanged, the cost per unit decreases as volume increases. Economies of scale

Question 5

Mixed (semi variable) costs

Answer 5

• combine fixed and variable elements

- ex. Rental car that charges a flat rate but the are extra charges for going over the mileage.

Question 6

High-low method

Answer 6

• less accurate compared to regression (scatter graph) method, but quicker
• used to estimate mixed cost

Steps:
1. Isolate variable cost

Variable portion of mixed cost using high- low method = cost at highest activity level - cost @ lowest activity level

Question 7

Relevant range

Answer 7

• range where per unit variable cost remain constant and fixed cost not changeable.
• same as short run
• established by efficiency of current manufacturing plant, agreements with labor unions and suppliers

Question 8

Linear cost functions

Answer 8

• costs that change at a rate (or remain unchanged) over the short run

Question 9

Non-linear cost functions

Answer 9

• fixed cost per unit
• step cost function : one that is constant over small ranges of output but increases by steps as level of activity increases

**both fixed and variable cost can display step cost characteristics. If narrow, then variable. If wide then fixed

Question 10

Marginal cost

Answer 10

• cost incurred by one unit increase in activity level of the cost driver
• remains constant across relevant range.