Question

When marketing or customer-service costs are incurred, the appropriate expense account is increased and cash control is decreased (or Accounts Payable control would be increased, if the items/ services are purchased on account). True or False?

Answer 1

The statement is true.

Step-by-step explanation:

When a company incurs marketing or customer-service costs, the expenditure is recorded by increasing the appropriate expense account. This action reflects the economic reality that when businesses buy goods or services from the firms, the payments made for these purchases are consumer expenditures. If the payment is made in cash, the company's cash control decreases. If the purchase is made on credit, the company's Accounts Payable control increases instead. Understanding the nature of fixed and variable costs is essential in grasping how costs behave in response to changes in production levels. Fixed costs, such as rent on a factory, do not change with the level of production, while variable costs fluctuate with production activity.

Whether a business can pass these costs to consumers depends on several factors, including the price elasticity of demand. If demand is inelastic, companies may be more successful in passing on the costs without significantly decreasing quantity sold. However, if demand is elastic, an increase in price can lead to a substantial decrease in quantity demanded, potentially harming profits.