Question

Question 1

[CLO-2] Explain how a manager should determine which revenues and costs are relevant in decision making. Give two examples.

Essay (no model answer given) 5 points

Question 2

[CLO-2] What are the differences between fixed and variable costs? Explain, and give an example of each.

Essay (no model answer given) 5 points

Question 3

[CLO-2] ‘Fixed overhead costs per unit can never be useful for budgeting.’ Do you agree with this opinion? Give reasons for your answer.

Essay (no model answer given) 5 points

1

in simple pleas

Answer 1

1]	Relevant revenues and costs are those revenues and costs
	that are relevant for the decision making on hand.
	They are revenues and costs that are of future import and
	differ between alternatives that are evaluated. Past costs
	are irrelevant.
	Examples of relevant revenue:
	*When a machine is replaced with another, relevant
	revenues are the incremental revenues, that is the
	difference in revenue got from the old machine and the
	revenue that would be got from the new machine.
	*When a new product is introduced, the relevant revenues
	are the revenue from the new product that is introduced
	and the increase/decrease in the revenues of the exisitng
	products.
	Examples of relevant cost:
	*Segmental fixed costs that are avoidable if, a segment
	is discontinued, are relevant to the decision. But allocated
	fixed costs are irrelevant.
	*While evaluating lease or buy alternatives, maintenance
	cost is relevant if the lessor bears it. In that case it has to
	be considered as a cost of buying.
2]	Fixed cost is a cost that does not vary in total, whatever
	the volume of output within the relevant range.
	But, the fixed cost per unit varies inversely with the
	volume of output. It means that the fixed cost per unit
	decreases when volume is increased and vice versa.
	Example:
	Salary of production supervisor. This cost does not change
	with volume of activity. But the per unit incidence varies
	inversely with volume of production.
	Variable cost means that cost which will remain the
	same per unit of the output. Example: Direct material cost
	per unit.
	But, the total variable cost varies directly with the volume
	of output.
3]	I agree with the opinion.
	As fixed costs do not vary with the volume of output [when
	the output is within the relevant range of production], the
	unit variable cost has no relevance. Fixed costs are to be
	budgeted in total.