Concept explainers
Fixed costs are often defined as “fixed over the short run.” Does this mean that they are not fixed over the long run? Why or why not?
Comment on the given statement about the nature of fixed costs.
Explanation of Solution
Fixed cost:
Fixed cost does not vary with the change in the production of the goods. It stays the same at the various level of output. Generally, fixed cost is not output-related; it is time-related.
“Fixed over short run”:
The short run has a time-span of 12 months or less than 12 months. Generally, fixed cost remains fixed over the short run of business. Insurance, rent, interest, taxes, and depreciation are the fixed cost of the business, and these costs do not change in the short run of business. But this does not mean that they are fixed over the long run of the business. Fixed cost may remain fixed or may change in the long run. It depends on the course of activity and management decision.
Example:
A business may choose to relocate its plant from location A to location B after five years. Location B has higher rent then location A. This will lead to the change in fixed cost as business has to pay higher rent in location B. If the management does not choose to relocate then the fixed cost will not change.
Thus, the fixed cost remains fixed in the short run, but it may or may not vary in the long run depending upon the course of activity and decisions of management.
Want to see more full solutions like this?
Chapter 4 Solutions
Gen Combo Fundamentals Of Cost Accounting; Connect Access Card
- “There is no such thing as a fixed cost. All costs can be ‘unfixed’ given sufficient time.” Do you agree? What is the implication of your answer for CVP analysis?arrow_forwardHow does the length of the time horizon affect the classification of a cost as fixed or variable? What is the meaning of short run? Long run?arrow_forwardWhy might it be misleading to show the fixed costs on a per unit basis?arrow_forward
- ‘Costs maybe classified in a different type of behavioural costs such as variable and fixed costs according to their nature and usage. Variable costs are controllable, on contrary fixed costs are not’. Do you agree with this statement? Why?arrow_forwardWhat is the term used to describe costs that increase in steps? A. Variable costs B. Fixed costs C. Mixed costs D. Semi-fixed costsarrow_forwardFixed costs that management can decide not to incur at any time are: always variable. unavoidable costs. relevant costs. discretionary costs.arrow_forward
- Which of the following is true about the changes in fixed cost? An increase in production will result in an increase in per unit fixed cost. A decrease in fixed cost will result in an increase in variable cost. An increase in production will result in a decrease in per unit fixed cost. A decrease in production will result in an increase in total fixed cost.arrow_forward‘Costs maybe classified in a different type of behavioural costs such as variable and fixed costs according to their nature and usage. Variable costs are controllable, on contrary fixed costs are not’. Do you agree with this statement? Justify.arrow_forwardWhat happens to the total variable costs and the total fixed costs when the level of activity increases or decreases? How about the unit variable cost and the unit fixed cost?arrow_forward
- Which of the following statements is CORRECT with respect to fixed costs per unit? Select one: A. They will decrease as production decreases. B. They will remain the same as production levels change. C. They will increase as production increases. D. They will increase as production decreases.arrow_forwardWhich of the following statements is CORRECT with respect to fixed costs per unit? Select one: A.They will decrease as production decreases. B.They will increase as production increases. C.They will increase as production decreases. D.They will remain the same as production levels change.arrow_forwardwhat is the definition of fixed, variable, and mixed costs? Are variable costs or fixed costs easier to control?arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning