Question

which of the following statements is true? if activity is higher than expected, total fixed costs should be higher than expected. if activity is lower than expected, total fixed costs should be lower than expected. comparing a static planning budget to actual costs is not a good way to assess whether variable costs are under control. in a flexible budget, when the activity declines, the total variable cost also declines.

Answer 1

Total fixed costs should be higher or lower depending on whether the activity is higher or lower than expected. Comparing a static planning budget to actual costs is not recommended for evaluating variable costs. In a flexible budget, when activity declines, total variable cost also declines.

Step-by-step explanation:

In a short-run perspective, a firm's total costs can be divided into fixed costs and variable costs. Fixed costs are expenditures that do not change regardless of the level of production, while variable costs change with the level of production.

If activity is higher than expected, the total fixed costs should be higher than expected. This is because higher activity levels can lead to increased expenses such as maintenance, labor, or raw materials. On the other hand, if activity is lower than expected, the total fixed costs should be lower than expected as there will be fewer expenses incurred.

Comparing a static planning budget to actual costs is not a good way to assess whether variable costs are under control. Variable costs can fluctuate due to changes in production levels, input prices, or other factors. Instead, a flexible budget that adjusts for changes in activity levels is a better tool for evaluating variable costs.

Furthermore, in a flexible budget, when the activity declines, the total variable cost also declines. This is because variable costs are directly linked to the level of activity. For example, if the activity is producing 100 units and the variable cost per unit is $10, the total variable cost would be $1000. If the activity declines to producing 50 units, the total variable cost would decrease to $500.

Answer 2

If activity is higher than expected, total fixed costs should be higher than expected. If activity is lower than expected, total fixed costs should be lower than expected. Comparing a static planning budget to actual costs may not be a good way to assess whether variable costs are under control. In a flexible budget, when the activity declines, the total variable cost can also decline.

Step-by-step explanation:

In a short-run perspective, if the activity level is higher than expected, the total fixed costs should be higher than expected. This is because fixed costs are incurred regardless of the level of production and do not change in the short run. So, if the activity level increases, the fixed costs will also increase.

On the other hand, if the activity level is lower than expected, the total fixed costs should be lower than expected. This is because fixed costs are not affected by the level of production, so they will remain the same or decrease when the activity level decreases.

Regarding comparing a static planning budget to actual costs, it may not be a good way to assess whether variable costs are under control. This is because a static planning budget only considers a specific level of activity and does not account for changes in variable costs that may occur with different levels of production.

In a flexible budget, when the activity declines, the total variable cost can also decline, depending on the variable cost per unit of activity. If the variable cost per unit of activity remains constant or decreases, then the total variable cost will also decrease when the activity declines.