Question

3-5 How do management's product and service choices affect cost behavior? 3-6 Why are fixed costs also called capacity costs? 3-7 How do committed fixed costs differ from discretionary fixed costs? 3-8 Why are committed fixed costs the most difficult of the fixed costs to change? 3-9 What are the primary determinants of the level of committed costs? Discretionary costs? 3-10 "Planning is far more important than day- to-day control of discretionary costs." Do you agree? Explain.

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Answer 1

Note: Answer to first 4 sub part only as HOMEWORKLIB Policy. Please post the other questions separately.

Answer 3.5 Managers can influence cost behavior through their decisions about such factors asproduct or service attributes, capacity, technology, and policies to create incentivesto control costs.Product and Service Decisions and the Value Chain - product mix, design,performance, quality, features, distribution and so on influence costs (i.e., the value chain).

Answer 3.6

Fixed costs are also called capacity costs as they are able to attain a pre-defined level of production or they extend an intended level of service, keeping the product or service attributes or key indicators intact such as quality, price etc. Examples of capacity-related costs are depreciation on production equipment (the capacity-related resource) and salaries paid to employees (the capacity-related resource) in a consultancy. The cost of a capacity-related resource is often called a fixed cost because the cost of there source is independent of how much of the resource is used.

Answer 3.7

A discretionary fixed cost is an expenditure for a period-specific cost or a fixed asset, which can be eliminated or reduced without having an immediate impact on the reported profitability of a business. A discretionary fixed cost varies from a committed fixed cost, in that a committed cost obligates a business to continue making payments over a certain period of time (such as the lease on an office building). A discretionary fixed cost is also known as a managed fixed cost. The following can be considered discretionary fixed costs:Advertising campaigns, Employee training, Investor relations, Public relations, Research and development activities for specific products

Answer 3.8

Committed fixed costs are the most difficult to change because long-term commitments generally have been made. These long-term commitments may involve legal contracts which would be costly to renegotiate or dissolve. Committed fixed costs also are difficult to change because doing so may mean greatly changing the way the organization conducts its activities. Changing these committed fixed costs may also mean changing organization structure, location, employment levels, and products or services.