7/25/2019 Feb 1 Assignment
1/1
Submitted by -Suryakant Kaushik
Kappa
Ex- 2.58:-
Erika's criticism stands weak because while predicting the cost
per unit of an item in a
factory, we can't take into account all the direct, indirect
& fixed, variable costs at one
time. This could lead to inflated result and won't give us
accurate estimation of cost per
unit. In the factory, the machine could be producing a definite
number of units in one
step. nd, raising the number of units after a certain number
could add some cost. !o,
its not like step costs are incurred in per unit production.
They are coming after a certain
batch of units are produced . !tep costsstay at the same level
for a certain activity
range, but "ump to a higher amount if the volume of activity
increases beyond that
range. !tep costs relate to fixed costs and variable costs in a
straightforward way.
step cost behaves more like a variable cost as the step si#e
decreases. It behaves more
like a fixed cost as the step si#e increases. In sum, when we
classify all costs as fixed
or variable with respect to sales volume, we are saying that all
costs are either
independent of or proportional to sales volume. s a result, when
decision makers need
finer estimates, they use the cost hierarchy. $enerali#ing the
classification by using the
cost hierarchy allows us to consider unit%, batch%, product%,
and facility%level activities,
which in turn helps us to estimate better the costs of a
decision option. atch%level
costs depend on the number of batches produced number of setups(
instead of units.
)roduct%level costs do not depend on the number of batches and
units. *inally, costs
that do not vary at the unit level, the batch level, or the
product level are facility%level
costs. These are costs related to renting the workplace,
insurance of workers etc.
!o, some costs has to be taken per batch step costs( and some as
per the duration of
the facility, e.g., monthly or yearly payment of rent. This way
of considering the costs
would give better estimates compared to Erika's way of
considering the costs.
