Answer:
- Treating fixed costs as if they are variable can lead to bad decisions.
- Changes in activity have no impact on actual fixed costs within the relevant range.
- A fixed overhead volume variance results from treating fixed manufacturing costs as if they are variable.
Explanation:
- Treating fixed costs as if they are variable can lead to bad decisions.
Variable cost is depended on the amount of goods you produced. The amount of Fixed costs stays the same regardless of the amount of goods your produced.
Typically, fixed cost tend to be really expensive. But, it will lower the overall cost that you need to produce a single product in the long run. But this won't happen until your company near its maximum efficiency. This difference make it really important for you to treat fixed cost differently than variable cost.
- Changes in activity have no impact on actual fixed costs within the relevant range.
For example,
Let's assume that you have a collection of machines that can produce the maximum of 2000 units per day.
If you only produce 1000 units per day, the amount of money you need to operate the machine would relatively be the same as producing 2000 units. If you change it to 1100 units per day, the cost will still relatively the same as long as it does not exceed 2000 units.
- A fixed overhead volume variance results from treating fixed manufacturing costs as if they are variable.
This is somewhat true. A fixed overhead volume variance occures if the amount of production that occurs is different compared to the budget.
This tend to make you need to add additional fixed cost to accommodate the increasing production (similar to the treatment of variable cost)
