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Which of the following statements are true? Multiple select question. Treating fixed costs as if they are variable can lead to bad decisions. A fixed overhead volume variance results from treating fixed manufacturing costs as if they are variable. In absorption costing, fixed manufacturing costs are applied to production in large chunks, rather than on a per unit basis. Changes in activity have no impact on actual fixed costs within the relevant range.

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Answer:

  • Treating fixed costs as if they are variable can lead to bad decisions.
  • A fixed overhead volume variance results from treating fixed manufacturing costs as if they are variable.
  • Changes in activity have no impact on actual fixed costs within the relevant range.

Explanation:

Fixed costs should not be treated as variable costs because this can lead to bad accounting decisions. Fixed costs do not change regardless of production activity within a certain range and so treating them like they do can lead to either an overestimation or underestimation of costs.

Fixed overhead volume variance for instance, results from fixed manufacturing costs being treated as if it is variable because the fixed costs should be known before production as it is not expected to change. If there is a variance then that means that it changed on account of it being treated as a variable cost.

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