Question 1

Committed fixed costs usually arise from the possession of facilities, equipment, and basic organization.

Accepted Answer

Committed fixed costs are those that a company must pay regardless of level of production or sales. They typically arise from owning property, equipment, and infrastructure needed to run the business.

Question 2

Discretionary fixed costs have obvious relationships with levels of capacity or output activity.

Accepted Answer

Discretionary fixed costs, such as advertising, research and development, and public relations, do not have obvious relationships with levels of capacity or output activity; they are often determined by management decisions and can be adjusted more easily than committed fixed costs.

Question 3

The use of high-technology methods rather than labor usually means a much greater fixed-cost component to the total cost.

Accepted Answer

High-technology methods often involve expensive machinery and equipment, leading to a higher fixed cost.

Question 4

The use of high-technology methods rather than labor usually creates lesser risks for companies with wide variations in demand.

Accepted Answer

High-technology methods often involve significant fixed costs and less flexibility, which can increase risks for companies facing wide demand variations.

Question 5

Managers cannot alter discretionary fixed costs easily.

Accepted Answer

Discretionary fixed costs, such as advertising, research and development, and public relations expenses, can be altered more easily by management decisions compared to committed fixed costs like leases and contracts.

Question 6

A telephone bill, which includes a monthly base rate plus an extra fee for each minute of long-distance service, is an example of a variable cost.

Accepted Answer

A telephone bill with a monthly base rate represents a fixed cost, while the extra fee for each minute of long-distance service is the variable cost component.

Question 7

One of the reasons why cost functions are important is to help managers make proper long-run decisions.

Accepted Answer

Cost functions help managers understand the cost behavior of their business and make informed decisions about pricing, production levels, outsourcing, and other long-run decisions that can affect profitability. By understanding the relationship between costs and output, managers can identify opportunities to reduce costs, increase efficiency, and improve profitability over time.

Question 8

Volume-driven costs can be easily traced to products or services.

Accepted Answer

Volume-driven costs are costs that change in proportion to the volume of goods or services produced. Since they are directly tied to the quantity of products or services produced, they can be easily traced back to them.

Question 9

Managers can vary spending levels broadly in the short run.

Accepted Answer

Managers have the ability to adjust spending levels in the short run based on changes in the business environment, such as fluctuations in demand or unexpected expenses. However, in the long run, spending levels may be constrained by factors such as budgets, investor expectations or industry standards.

Question 10

Step costs change abruptly at intervals of activity.

Accepted Answer

Step costs are fixed within a certain range of activity but change abruptly when activity increases or decreases beyond that range. This is because some costs are only incurred when certain production or activity levels are reached, resulting in a jump in expenses.

Question 11

Most companies make a capacity decision frequently.

Accepted Answer

Capacity decisions are significant, long-term commitments of resources that are not made frequently. They involve substantial investment and are often difficult to reverse, thus companies tend to make these decisions after careful and strategic planning.

Question 12

Capacity costs are the mixed costs of being able to achieve a desired level of production or service while maintaining product or service attributes.

Accepted Answer

Capacity costs are fixed costs that do not vary with the level of production or service output. They are associated with the maximum output or service level that can be achieved, rather than being mixed costs. Mixed costs contain both fixed and variable components.

Question 13

An example of a committed fixed cost is insurance.

Accepted Answer

Committed fixed costs are expenses that cannot be easily changed and are necessary for the operation of a business. Insurance is a common example of a committed fixed cost as it is typically required by law or contract, and cannot be easily adjusted without significant consequences.

Question 14

An example of a volume-driven cost in making a textbook is the salaries of the editorial staff.

Accepted Answer

Volume-driven costs vary with the volume of production, such as the cost of paper or printing supplies for textbooks. Salaries of the editorial staff are typically fixed costs, not varying directly with the number of textbooks produced.

Question 15

Committed fixed costs can be altered by management if management decides that different levels of spending are desirable.

Accepted Answer

Committed fixed costs are long-term, cannot be easily altered, and are not subject to change based on management's short-term decisions. They typically include expenses like rent, insurance, and salaries of permanent employees.

Question 16

Companies cannot recover fixed capacity costs when demand falls during an economic downturn.

Accepted Answer

Fixed capacity costs refer to the expenses that a company incurs for maintaining its facilities and operations regardless of its level of production or sales. These costs include expenses for rent, depreciation of machinery and equipment, salaries of staff, and other overhead expenses. Since these costs are incurred irrespective of the level of demand for the company's products or services, the company cannot recover them when demand falls during an economic downturn. This results in lower profitability and financial losses for the company.

Question 17

Linear-cost behavior is graphed using a straight or curved line.

Accepted Answer

Linear-cost behavior is graphed using a straight line, as it reflects a constant rate of change in costs relative to activity levels.

Question 18

Mixed costs contain elements of only fixed-cost behavior.

Accepted Answer

Mixed costs contain elements of both fixed-cost and variable-cost behavior.

Question 19

By their decisions, managers influence cost behavior throughout the entire value chain.

Accepted Answer

Managers make decisions on pricing, production levels, and resource allocation, which can affect cost behavior in various activities along the value chain, such as procurement, manufacturing, and distribution. Their decisions can either increase or decrease costs, depending on the chosen strategy and the efficiency of operations.

Question 20

Measurement of cost behavior means understanding and quantifying how activities of an organization affect its levels of costs.

Accepted Answer

Cost behavior refers to understanding how different activities, such as production levels, sales volume, or changes in technology, affect an organization's costs. Measuring cost behavior involves identifying the relationship between costs and their underlying drivers, such as activity levels or time. By understanding and quantifying cost behavior, managers can make better decisions about pricing, product mix, production volumes, and other key business activities.

Quiz 3: Measurement of Cost Behavior