Question

5 points 21 "Managers should be wary of using the same unitized foved overhead costs for planning and control purposes. Do you agree with this argument? Give reasons for your answer. T T Arial 3 (12pt)

Answer 1

Yes agree with statement. Fixed overhead costs are fixed in nature that is they do not change at overall level. They keep varying at unit level based on level of activities. Higher the level of production lower is the unit cost and lower the level of production higher is the per unit cost. Fixed costs are usually absorbed based on normal volume at beginning of the year. A per unit fixed overhead cost is determined beginning of the year based on which planning and controlling is done throughout the year. Hence managers should be careful in applying same per unit fixed overhead for different purposes. Fixed overhead cost is not relevant cost in few decision making purpose like acceptance of special order, Make vs. buy decision, etc. Fixed overhead cost is relevant in few cases like pricing decision, new product launches, Job bidding etc. Unitized fixed overhead is relevant in Absorption costing since it is part of product cost but in Variable costing it is not relevant since it is charged to the period in which it is incurred.