Question

Which of the following statements are true and which are false ? Correct the false one

a. Labor wages are a variable cost.
b. A book cost is just another word for a cost that
generates a cash flow.
c. Total overhead costs are independent of the capacity
of an operation (e.g., the size of a manufacturing
plant).
d. Depreciation is a type of cash flow.
e. Thesizeofsunkcostsshouldnotaffecttheprojection
of future cash flows.
f. The sale of assets can be used to offset disposal costs.
g. For a perfect monopoly to exist, there must be no
substitute goods available.
h. The opportunity cost of money is usually measured
by the interest that could be earned by depositing
the money.
i. All firms want to operate at the level of economic
breakeven.
j. Perfect competition incorporates the free entry and
exit of firms in the market.
k. The cost-volume relationship indicates that firms
ought to operate at the point of maximum revenue.
l. Life-cycle costs are the sum of all costs associated
with a product over its lifespan.
m. Direct costs are commonly referred to as the
overhead costs of a manufacturing plant.
n. The fastest increase in cumulative committed life-
cycle costs occurs in the acquisition phase.
o. Private cars are consumer goods while trucks are
producer goods.

p. The non-refundable cost of setting up an operation
(e.g., the cost of building a factory) is not considered
a type of opportunity cost.
q. There is no D
∗
for this situation: p = 50 − 0.1D and
C
T
= $100 + $30D.
r. More than one economic breakeven point may exist
for a given manufacturing plant.
s. Firms attempt to reduce costs so as to increase the
level of production at which economic breakeven
occurs.

Answer 1

a. Labour wages are considered to come under both fixed as well as variable cost. In other words its semi-variable cost. Wages paid to workers for their regular hours are a fixed cost. Any extra time they spend on the job is a variable cost.

b. False. A book cost is not a cash flow, but it is an accounting entry that represents some change in a given value.

c. False. Total Overhead Cost are expenses associated with the maintenance and administration of a business on a day-to-day basis. The total operating cost for a company includes the cost of goods sold, operating expenses as well as overhead expenses.

d. True. depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes.

e. False. Sunk costs are the cost that has already occured in the past and are thus irrecoverable.

f. False. Sale proceeds are shown in the credit side of the asset account , when the asset is sold at their end of its useful life. The Profit or The Loss incurred is shown in the P/L Acount

g. True.

h. False. Opportunity cost is the value of the next best alternative or option. This value may or may not be measured in money.

i.True.

j.True.

k. True.

l.True.

m. False. Indirect cost are the overhead expense of manufacturing plant.

n.

o. True.

p. True.

q.

r. True.

s.True.