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Questions and Answers
What happens to total variable costs when the level of activity increases?
What happens to total variable costs when the level of activity increases?
- They decrease by the same percentage as the increase in activity.
- They become fixed costs at higher activity levels.
- They remain constant regardless of activity level.
- They increase by the same percentage as the increase in activity. (correct)
Which of the following is an example of discretionary fixed costs?
Which of the following is an example of discretionary fixed costs?
- Property taxes on company facilities.
- Rent for leased office space.
- Advertising expenditures decided upon by management. (correct)
- Salaries of management personnel.
How do committed fixed costs behave regardless of activity levels?
How do committed fixed costs behave regardless of activity levels?
- They remain constant in total amount. (correct)
- They can be fully eliminated during downtimes.
- They are easily adjustable based on management preference.
- They fluctuate significantly with changes in production.
Which statement best describes the relationship between fixed costs and activity levels?
Which statement best describes the relationship between fixed costs and activity levels?
Which of the following cost types is influenced most by a company’s operational activity level?
Which of the following cost types is influenced most by a company’s operational activity level?
What is the primary characteristic of fixed costs?
What is the primary characteristic of fixed costs?
Which of the following accurately describes variable costs?
Which of the following accurately describes variable costs?
Which of the following is an example of a direct cost?
Which of the following is an example of a direct cost?
What type of costs are typically within the control of management?
What type of costs are typically within the control of management?
What does cost behavior analysis primarily focus on?
What does cost behavior analysis primarily focus on?
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Study Notes
Cost Behavior
- Variable Cost: Changes in total are directly proportional to activity level.
- Example: 15% increase in activity yields 15% increase in total variable costs.
- Fixed Cost: Total amount remains constant regardless of activity level; per-unit cost varies inversely with activity changes.
- Committed Fixed Costs: Costs tied to organization structure, such as property taxes and management salaries.
- Discretionary Fixed Costs: Costs based on management decisions for specific purposes, like advertising and research funding.
Costs in Decision Making
- Differential Cost: Also known as incremental cost; difference in cost between two alternative actions.
- Relevant Cost: Costs incurred in one alternative but not in another; irrelevant if incurred in both alternatives.
- Standard Cost: Predetermined cost based on past experiences and industry standards; reflects actual capacity.
Period Cost
- Matched with revenue for the period in which incurred, impacting financial statements and decision-making processes.
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