Solutions_CH 03 - CHAPTER 3 ACTIVITY COST BEHAVIOR...

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CHAPTER 3 ACTIVITY COST BEHAVIOR QUESTIONS FOR WRITING AND DISCUSSION 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 vari- able costs may be totally appropriate. Know- ing what costs are variable and what costs are fixed can help a manager make better bids. 2. The longer the time period, the more likely that a cost will be variable. The short run is a period of time for which at least one cost is fixed. In the long run, all costs are vari- able. 3. Resource spending is the cost of acquiring the capacity to perform an activity, whereas resource usage is the amount of activity ac- tually used. It is possible to use less of the activity than what is supplied. Only the cost of the activity actually used should be as- signed to products. 4. Flexible resources are those acquired from outside sources and do not involve any long-term commitment for any given amount of resource. Thus, the cost of these re- sources increases as the demand for them increases, and they are variable costs (vary- ing in proportion to the associated activity driver). 5. Committed resources are acquired by the use of either explicit or implicit contracts to obtain a given quantity of resources, regard- less of whether the quantity of resource available is fully used or not. For multiperiod commitments, the cost of these resources essentially corresponds to committed fixed costs. Other resources acquired in advance are short term in nature and essentially cor- respond to discretionary fixed costs. 6. 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. An engineer’s salary is an example of such an expenditure. 7. A variable cost increases in direct proportion to changes in activity usage. A one-unit in- crease in activity usage produces an in- crease in cost. A step cost, however, in- creases only as activity usage changes in small blocks or chunks. An increase in cost requires an increase in several units of activity. When a step cost changes over rel- atively narrow ranges of activity, it may be more convenient to treat it as a variable cost. 8.
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This note was uploaded on 09/26/2010 for the course ACCT 1401 taught by Professor Tram during the Spring '10 term at University of Houston-Victoria.

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Solutions_CH 03 - CHAPTER 3 ACTIVITY COST BEHAVIOR...

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