Question

Which of the following does management take into account when determining expenses?

A. Historical costs only
B. Variable costs only
C. Fixed costs only
D. Both variable and fixed costs

Answer 1

Management considers both variable and fixed costs when determining expenses, as these provide a complete picture of total costs involved in production. Option D is correct.

Step-by-step explanation:

When determining expenses, management must take into account both variable and fixed costs. Fixed costs, such as rent on a factory or lease payments, are consistent regardless of the level of production. On the other hand, variable costs change with the level of output and can exhibit diminishing marginal returns, meaning that the marginal cost of producing additional units increases as production rises. Together, these types of costs provide a comprehensive view of the total expenses a firm may incur.