A Major Disadvantage of the Observation Method of Analyzing Cost

question 12

Multiple Choice

A major disadvantage of the observation method of analyzing cost behavior is:

• A)It bases its solution on only two observations.
• B)It results in its analyzed cost being treated as either fixed or variable,based on which type of behavior it more closely resembles.
• C)Two persons could draw different lines through the data points.
• D)It enables non-representative points,called outliers,to be identified.

Define and apply the concept of sunk costs in decision-making.

Explain and identify erosion costs in the context of new projects.

Calculate and comprehend the tax benefits of selling assets and depreciation.

Assess changes in net working capital and its impact on project cash flows.

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Definitions:

Total Fixed Costs

The sum of all costs that do not change with the level of production or sales over a certain period.

Unit Fixed Costs

The fixed costs associated with producing a single unit of product, which remain constant regardless of the level of production or sales volume.

Period Cost

Costs that are not directly tied to the production of goods and are expensed in the period they are incurred, such as selling, general, and administrative expenses.

Product Cost

The total cost associated with making or acquiring a product, including materials, labor, and overhead.