AFM123 Chapter Notes - Chapter 2: Sunk Costs, Fixed Cost, Opportunity Cost

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raspberryelephant299

18 Mar 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM123

Professor

Peter Blake

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Document Summary

Costs can be classiied using 4 broad categories: behaviour, traceability, relevance and function. Cost behaviour: the way a cost responds to changes in the level of business activity. Variable cost (vc): varies in direct proportion to changes in level of activity. Level of activity could be amount of output or hours of operations (ie. wage costs) Note: vc is constant if expressed on a per-unit basis (ex. Fixed cost (fc): remains constant, regardless of changes in level of activity. Note: fc can vary if there is a price change or a substantial increase in demand leading to an increase in the resource requirement. Fc is ixed within some relevant range (range of activity within which the assumptions about vc and fc are valid) Fc can be confusing if expressed on a per-unit basis because the average fc per unit changes with changes in activity. Cost object: anything for which cost data are desired.

Related Questions

1. Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range?

A. Average cost per unit.

B. Variable cost per unit.

C. Unit fixed cost.

D. Total variable cost.

2. The relevant range refers to the activity levels over which

A. Cost relationships hold constant.

B. Costs fluctuate.

C. Production varies.

D. Relevant costs are incurred.

3. When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?

A. General and administrative costs are assumed to be variable costs.

B. Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.

C. Total costs are assumed to be linear when plotted on a graph.

D. The relevant time period is assumed to be 5 years.

4. A management accountant is about to prepare graphs of total variable cost and per-unit variable cost for use in a short-term planning model. Dollars will be depicted on the vertical axis; activity will be shown on the horizontal axis. How will these graphs appear under completion?

Total Variable Cost; Per-Unit Variable Cost

A. Straight line, sloping upward to the right; Straight line, parallel to the horizontal axis

B. Curvilinear, sloping upward to the right; A line that basically parallels the horizontal axis, first decreasing and then increasing

C. Straight line, sloping upward to the right; Straight line, sloping upward to the right

D. Straight line, parallel to the horizontal axis; Straight line, sloping upward to the right

5. A company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning electricity cost is incorrect?

A. The total electricity cost will increase as production volume increases.

B. The total electricity cost per unit of production will increase as production volume increases.

C. The variable electricity cost per unit of production will remain constant as production volume increases.

D. The fixed electricity cost per unit of production will decline as production volume increases.

silversnake284

This question has five parents:

1. Variable costs in total increase or decrease in proportionwith changes in the level of business activity:

a. true b. false

2. Variable cost per unit remains constant when the number ofunits produced changes:

a. true b. false

3. Fixed cost per unit remains the same even though there is achange in the number of units produced:

a. true b. false

4. Managerial accounting stresses accounting concepts andprocedures that are relevant to preparing reports for:

a. investors and banks

b. internal users of accounting information

c. shareholders and creditors

d. the Security and Exchange Commission (SEC)

5. Kilwinâs Candies produced and sold 600 boxes of chocolatecovered popcorn last month and had total variable costs of $2,100that reflected the cost of chocolate and popcorn (ingredients).Each box of popcorn for $12.00. If production and sales areexpected to increase by 10% next month, which of the followingstatements are true?

a. Total variable costs are expected to be $1,785.

b. Variable cost per unit is expected to be $3.50.

c. Unit variable costs are expected to be $2.10.

d. Total fixed costs will be $150,000.

magentalocust842

Why is it important to identify the most appropriate costdrivers for a particular product?

A) so managers can identify the activities necessary tomanufacture a product

B) so managers can control product costs better

C) so managers can predict product costs better and make betterdecisions

D) B and C

Answer:

Cost drivers are ________.

A) the different functions in the value chain

B) different types of functional areas in the firm

C) measures of activities that require the use of resources andthereby cause costs

D) different types of cost calculations

Answer:

Within the relevant range, the total amount of ________ costchanges in direct proportion to changes in the cost driver. Withinthe relevant range, the total amount of ________ cost does notchange in direct proportion to changes in the cost driver.

A) fixed; variable

B) variable; fixed

C) step; mixed

D) mixed; step

Answer:

What happens when the cost-driver level increases within therelevant range?

A) Total fixed costs remain unchanged.

B) Fixed costs per unit of cost driver increase.

C) Total variable costs decrease.

D) Variable costs per unit of cost driver increase.

Answer:

Which of the following costs is a fixed cost?

A) cost of dairy ingredients used to produce ice cream

B) depreciation expense on factory building

C) fuel used by delivery trucks

D) labor wages of workers who mix dairy ingredients to make icecream

goldalligator726

AFM123 Chapter Notes - Chapter 2: Sunk Costs, Fixed Cost, Opportunity Cost

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