Atkinson, Solutions Manual t/a Management Accounting, 6E

Chapter 3
Using Costs in
Decision Making
QUESTIONS
3-1 Cost information is used in pricing, product planning, budgeting, performance
evaluation, and contracting. Examples of specific uses of cost information
include deciding whether to introduce a new product or discontinue an existing
product (given the price structure), assessing the efficiency of a particular
operation, and assessing the cost of serving customer segments.
3-2 Variable costs are costs that increase proportionally with changes in the activity
level of some variable. Fixed costs are costs that in the short run do not vary with
a specified activity. Fixed costs depend on how much of the resource (capacity)
is acuired, rather than on how much is used.
3-3 Contribution margin per unit, which is the difference between revenue per unit
and variable cost per unit, is the contribution that each unit ma!es to covering
fixed costs and generating a profit. "he contribution margin is therefore an
important component of the euation to determine the brea!even point and to
understand the effect on profit of proposed changes, such as changes in sales
volume in response to changes in advertising or sales prices.
3-4 Contribution margin per unit is the difference between revenue per unit and
variable cost per unit. "he contribution margin per unit indicates how much the
total contribution margin will increase with an additional unit of sales. "he
contribution margin ratio expresses similar ideas, but as a percentage of sales
dollars. #pecifically, the contribution margin ratio is the total contribution margin
divided by total sales dollars (or contribution margin per unit divided by sales
price per unit), and indicates how much the total contribution margin increases
with an additional dollar of sales revenue.
3-5 $n evaluating whether a business venture will be profitable, the brea!even point
is the volume at which the profit euals %ero, that is, revenues eual total costs.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
3-6 ) mixed cost is a cost that has a fixed component and a variable component. For
example, utilities bills may include a fixed component per month plus a variable
component that depends on the amount of energy used. ) step variable cost
increases in steps as uantity increases. For example, one supervisor may be
hired for every (* factory wor!ers. +ixed costs and step variable costs both
have elements of fixed and variable costs. ,owever, mixed costs have distinct
fixed and variable components, with fixed costs that are constant over a fairly
wide range of activity (for a given time period) and variable costs that vary in
proportion to activity. #tep variable costs are fixed for a fairly narrow range of
activity and increase only when the next step is reached.
3-7 Step variable costs are fixed for a fairly narrow range of activity and increase
when the next step is reached. For example, one supervisor may be hired for
every (* factory wor!ers. Fixed costs are costs that in the short run do not vary
with a specified activity for a wide range of activity. For example, factory rent
per month would li!ely remain unchanged as production increased or decreased,
even if by large amounts.
3-8 Incremental cost is the cost of the next unit of production and is similar to the
economist-s notion of marginal cost. $n a manufacturing setting, incremental cost
is often defined as a constant variable cost of a unit of production. ,owever, in
some situations, the variable cost of a unit of production may be more
complicated. For example, the variable cost of labor per unit may decrease over
time if wor!ers become more efficient (a learning effect. )lternatively, the
variable cost of labor per unit will change during overtime hours if wor!ers
receive an overtime premium (commonly '*.). Finally, some costs exhibit step/
variable behavior, as when one supervisor can supervise a uantity of employees
but an additional supervisor is needed beyond a certain number of employees.
3-9 $n evaluating the different alternatives from which managers can choose, it is
better to focus only on the relevant costs that differ across different alternatives
because it does not divert the manager-s attention with irrelevant facts. $f some
costs remain the same regardless of what alternative is chosen, then those costs
are not useful for the manager-s decisions, as they are not affected by the
decision. "herefore, it is better to omit them from the cost analysis used to
support the decision. +oreover, resources are not expended to find or prepare
irrelevant information.
3-10 #un! costs are costs that are based on a previous commitment and cannot be
recovered. For example, depreciation on a building reflects the historical cost of
the building, which is a sun! cost. "herefore, they are not relevant costs for the
decision.
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Chapter ! "sing Costs in #ecision Making
3-11 "he general principal is that sun! costs are not relevant costs. 1ut, some
managers may consider sun! costs to be relevant because they may be concerned
about how others will perceive their original decision to incur these costs, and
may want to cover up their initial poor 2udgment. +anagers may also feel that
they do not want to waste the sun! costs by giving up on the possibility of some
benefit from the invested funds, or may continue to believe in potential success
despite overwhelming evidence to the contrary. )lso, managers may be
embarrassed and unwilling to admit they made a mista!e.
3-12 3o, fixed cost are not always irrelevant. For example, in comparing the status
uo and a proposal to substantially increase the uantity of goods or services
provided, additional fixed costs (that is, costs not proportional to volume) may
be incurred to provide the increased uantity. #uch costs might include a large
expenditure for more euipment or expanded factory facilities.
3-13 )n opportunity cost is the maximum value forgone when a course of action is
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