2. How does the length of the time horizon affect the classification of a cost a

Question

2. How does the length of the time horizon affect the classification of a cost as fixed or vari- able? What is the meaning of short run? Long run? 3. Explain the difference between resource spending and resource usage. 4. What is the relationship between flexible resources and cost behavior? 5. What is the relationship between committed resources and cost behavior? 6. Describe the difference between a variable cost and a step-variable cost. When is it reasona- ble to treat step-variable costs as if they were variable costs? 7. Why do mixed costs pose a problem when it comes to classifying costs into fixed and vari- able categories? 8. W hy is a scattergraph a good first step in separating mixed costs into their fixed and variable 9. What are the advantages of the scatterplot method over the high-low method? The high-low 10. Describe the method of least squares. Why is this method better than either the high-low 11. What is meant by the best-fitting line? Is the best-fitting line necessarily a good-iting line components? method over the scatterplot method? method or the scatterplot method? Explain. 12. When is multiple regression required to explain cost behavior? 13. Explain the meaning of the learning curve. How do managers determine the appropnale learning curve percentage to use? 14. Assume you are the manager responsible for implementing a new service. The time to per form the service is subject to the learning curve. Would you prefer that the new service have a learning rate of 85 percent or 80 percent? Why? 15. Some firms assign mixed costs to either the fixed or variable cost categories without any formal methodology to separate them. Explain how this practice can be defended.

Explanation / Answer

1. Time horizon affets the clasiification of the cost as "fixed cost " and "variable cost" to a great extent.

It plays the role of deciding factor while seperating the fixed cost and variable cost. In the shorter time horizon cost there will be both variable cost and fixed cost because organisation is still trying to hold of the production and a slighest change in any factor will affeect the whole production process and fixed cost will be paid for once in while for e.g rent, depreciation on machines.. However, in long time horizon all the cost becomes varaible cost because production capabilities can be easily varied and production is done at a larger level .

Short run : Short run is the period in which cost is divided into variable cost and fixed cost.

Long run : It is the period in which only variable cost exist .

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