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Chapter03 Solutions-Hansen6e

Chapter03 Solutions-Hansen6e - CHAPTER 3 COST BEHAVIOR...

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CHAPTER 3 COST BEHAVIOR QUESTIONS FOR WRITING AND DISCUSSION 1. Knowledge of cost behavior allows a manager to assess changes in costs that result from changes in activity. This allows a manager to assess the effects of choices that change activity. For example, if excess capacity exists, bids that minimally 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. 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 variable. 3. Resource spending is the cost of acquiring the capacity to perform an activity, whereas resource usage is the amount of activity actually used. It is possible to use less of the activity than what is supplied. Only the cost of the activity actually used should be assigned 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 resources increases as the demand for them increases, and they are variable costs (varying 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, regardless of whether the quantity of resources available is fully used or not. For multiperiod commitments, the cost of these resources essentially corresponds to committed fixed expenses. Other resources acquired in advance are short term in nature, and they essentially correspond to discretionary fixed expenses. 6. A variable cost increases in direct proportion to changes in activity usage. A 1-unit increase in activity usage produces an increase in cost. A step-variable cost, however, increases 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- variable cost changes over relatively narrow ranges of activity, it may be more convenient to treat it as a variable cost. 7. Mixed costs are usually reported in total in the accounting records. The amount of the cost that is fixed and the amount that is variable are unknown and must be estimated. 8. A scattergraph allows a visual portrayal of the relationship between cost and activity. It reveals to the investigator whether a relationship may exist and, if so, whether a linear function can be used to approximate the relationship. 9. Since the scatterplot method is not restricted to the high and low points, it is possible to select two points that better represent the relationship between activity and costs, producing a better estimate of fixed and variable costs.
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