Companies Sometimes Develop Standards Based on Historical Data

question 32

Multiple Choice

Companies sometimes develop standards based on historical data. Which of the following statements about this approach is correct?

• A) This is an appropriate approach for mature production process.
• B) This is an appropriate approach for processes that are labour intensive.
• C) This is an inappropriate approach because it is a relatively more expensive approach to standard setting.
• D) This approach is only acceptable for manufacturing companies.

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Definitions:

Sunk Costs

Costs that have already been incurred and cannot be recovered.

Incremental Cash Flow

The additional cash flow a company receives from undertaking a new project, after accounting for the expenses involved in the project.

Variable Costs

Costs that change in proportion to the level of production or sales activities, such as materials and labor.

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums.