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Unformatted text preview: Chapter 13 Using Cost Information to Manage and Control Questions for Review and Discussion 1. Fixed costs are fixed in that they do not vary with volume. However, they may vary with other factors. Heating and air conditioning costs, for example, vary with the outside temperature. Therefore, fixed costs may, in fact, change from month to month. 2. Average cost fails to take into account the distinction between fixed and variable costs. Therefore, average cost seldom provides a basis on which to calculate changes in total costs owing to an increase or decrease in volume. 3. Both fixed costs and variable costs tend to increase in steps. The essential difference between the two is that within the relevant range (that appropriate for the decision at hand) variable costs increase with volume while fixed costs remain the same. Therefore, when graphed over the relevant range, the fixed cost curve would be a horizontal line, the variable cost curve an upward sloping line. 4. Depreciation is an allocation of the cost of acquiring an asset a cost incurred in the past. Although for purposes of financial reporting it may be recognized in the future, it is nevertheless a sunk cost, one that cannot be recovered. 5. The terms of the initial contract proposed by the caterer may be exceedingly favorable, perhaps to allow it to establish what it hopes will be a long-term relationship with the organization. The terms of subsequent offers may be less advantageous. But having abandoned its food service, the organization may find it extremely difficult, and costly, to restore it. Moreover, it is likely that if the organization continued to operate the service, then it would have to replace some assets in each of the next three years. These assets will still have value at the end of the three-year period. Therefore, in carrying out the analysis over only a three year period, the organization would have to make arbitrary assumptions as to what would be done with those assets at the end of the period. 6. Factors other than direct cash flows that should be taken into account include: impact on employees and organizational morale; the nature of the activity, e.g., whether it is an inherent responsibility of government and can properly be turned over to outside parties; 13-1 indirect costs that will have to be incurred by the government attributable to the newly unemployed government workers, such as increased insurance, medical and welfare payments; additional tax revenues that will accrue from the new business being generated, and property owned, by the company providing the service. 7. Among the functions served by user charges are: They provide revenues....
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- Spring '08