Question

1. What are the three inventory accounts? List them, describe them and provide an example of the types of costs included in each inventory account.

2. What is the relevant range? Why would cost behaviour changes outside the relevant range? In your answer, describe an example (or examples) in your response.

3. Compare and contrast committed fixed costs and discretionary fixed costs. in your answer, provide at least one example of each type of cost and explain why it is a committed fixed cost or a discretionary fixed cost.

Answer 1

. The three types of inventory accounts are

· Raw materials

· Work in process

· Finished goods

Raw materials are the input used in manufacturing process to produce work in process and finally the output that is finished goods.

Work in process is the inventory arising out of manufacturing process. It is semi-finished goods

Finished goods – It is the final finished product which is available for sale in market

Example of type of cost included in each inventory account

· Raw materials - Direct material and indirect material

· Work in process – Manufacturing cost like Direct material, Direct labor and manufacturing overheads

· Finished goods – Manufacturing costs like Direct material , Direct labor and manufacturing overheads

2. Relevant range is a range between which the fixed costs remain fixed. A relevant range is useful in understanding the cost behaviour since it impacts fixed costs outside the relevant range. Fixed costs are fixed for a given range. Beyond this range the fixed costs tend to move up for next range of activity. Some of the costs behaviour in a variable way due to which fixed cost tends to go up. For example : Electricity cost included in fixed cost for a relevant range can move beyond that range since it varies with output and there is a minimum base charge to be paid.

3. Committed fixed costs are the costs which are based on multiyear organisational investments. These costs cannot be easily changed since they are committed.

Discretionary fixed costs are the cost which is incurred at the discretion of the management. They can be eliminated or reduced at the discretion of management.

Committed fixed costs are fixed and cannot be changed in the short term or long term. Hence they are committed in nature

Examples of Committed fixed costs – depreciation on buildings, insurance, taxes.

Discretionary fixed costs can be changed based on decisions needed for the business. Hence they are discretionary in nature

Examples of Discretionary fixed cost – Advertising, employees training