Managerial Accounting
*Minimum of 300 words*
Discuss why fixed costs are not relevant for most short-term decisions.
Fixed cost remains unchanged with the change in the level of production units at normal capacity. Fixed cost is same for whole year, fixed cost per unit decreases with Increases in level of production capacity. Variable cost will change with change in level of production capacity, variable cost per unit is constant at every level of production capacity.
Because of the short term decisions taken by the management of the entity, there is no change in the Fixed cost with Increase in level of production, the only change we may noticed is the change in variable cost. If there is no production in the company then, there is no variable cost but fixed costs are unchanged such are Rent for the premises, Interest for funds raised, Salaries of the employees, insurance and property taxes of the equipment and the factory building and depreciation and amortization.. etc.
For example: with the short term decision taken by management of the entity, it won't affect the size of premises of factory, which may be affect in long term decision. In other words we can say that with the short term decision taken by management of the entity, it won't affect (change) Rent for the premises of the entity.
Accepting New orders, Outsourcing of services and Alteration of current production are examples of Short term decision, these decisions won't affect the fixed costs, example : Rent (size of the premises) purchasing equipment, launching new product and diversification of business are examples of Long term decisions may affect the fixed cost, example : Rent ( size of the premises). As per the analysis above, the fixed costs are not relevant for most of the Short term decisions taken by the management of the entity.
Managerial Accounting *Minimum of 300 words* Discuss why fixed costs are not relevant for most short-term...
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