Ch03 - CHAPTER 3 COST BEHAVIOR DISCUSSION QUESTIONS 1...

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CHAPTER 3 COST BEHAVIOR DISCUSSION QUESTIONS 1. Knowledge of cost behavior allows a man- ager to assess changes in costs that result from changes in activity. This allows a man- ager to assess the effects of choices that change activity. For example, if excess ca- pacity exists, bids that at least cover variable costs may be totally appropriate. Knowing what costs are variable and what costs are fixed can help a manager make better bids. 2. A driver is a factor that causes or leads to a change in a cost or activity; it is an output measure. The driver for general machine maintenance cost in a factory could be ma- chine hours. The driver for raw materials used is the number of units produced. 3. The cost formula for monthly shipping cost is: Monthly shipping cost = $3,560 + $6.70 (Packages shipped) The independent variable is packages shipped. The dependent variable is monthly shipping cost. The fixed cost per month is $3,560. The variable rate is $6.70. 4. Some account categories are primarily fixed or variable. Even if the cost is mixed, either the fixed component or the variable compon- ent is relatively small. As a result, assigning all of the cost to either a fixed or variable category is unlikely to result in large errors. For example, depreciation on property, plant, and equipment is largely fixed. The cost of telephone expense for the sales of- fice, if it consisted primarily of long-distance calls, could be seen as largely variable (vari- able with respect to the number of custom- ers). 5. Committed fixed costs are those incurred for the acquisition of long-term activity capacity and are not subject to change in the short run. Annual resource expenditure is inde- pendent of actual usage. For example, the cost of a factory building is a committed fixed cost. Discretionary fixed costs are those incurred for the acquisition of short- term activity capacity, the levels of which can be altered quickly. In the short run, re- source expenditure is also independent of actual activity usage. Salaries of engineers is an example of such an expenditure. 6. The concept of relevant range is important in dealing with step costs because if the relev- ant range is contained completely within one step, the cost behaves as a fixed cost. However, if the relevant range spans two or more steps, the accountant must be aware of the cost increase as output goes up within the relevant range. 7. Mixed costs are usually reported in total in the accounting records. How much of the cost is fixed and how much is variable is un- known and must be estimated. 8. The cost formula for a strictly fixed cost has only a fixed cost amount. There is no vari- able rate and no independent variable. For the depreciation example, the cost formula looks like this: Depreciation per year = $15,000 9. The cost formula for a strictly variable cost has only the variable rate and independent variable. There is no fixed component. For the electrical power example, the cost for- mula looks like this: Electrical power = $1.15 (Machine hours) 10. A scattergraph allows a visual portrayal of the relationship between cost and activity. It
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