1) Respond to this comment from an economist friend: ‘You cost-management analysts use an overabundance of cost terms to cover up the fact that you really do not understand opportunity costs. You create jobs for yourselves based on unintelligible jargon. Not that that’s a bad thing.’

2) Evaluate this criticism of the financial management of processes : ‘All this emphasis on operating income, regardless of how you measure it, contributes to our continuing, short-term outlook. If we focus only on operating income, managers will do whatever they can to increase that measure, regardless of long-term impacts. This is what is wrong with modern business. We need to look beyond this period’s operating income and focus on the only term.’

3) A colleague challenges you. ‘What do you mean that there is no such thing as a fixed cost? Pick up any microeconomics or cost accounting book and you will see the term used all the time. We have lots of fixed costs in our organisation, don’t we? What about your salary and the depreciation of your computer? Why do you want to replace fixed cost with committed cost?’

4) For the relevant cost data in items (1)–(7), indicate which of the following is the best classification.

(a) sunk cost (d) fixed cost (g) controllable cost

(b) incremental cost (e) semi-variable cost (h) non-controllable cost

(c) variable cost (f) semi-fixed cost (i) opportunity cost

(1) A company is considering selling an old machine. The machine has a book value of £20,000. In evaluating the decision to sell the machine, the £20 000 is a ...

(2) As an alternative to the old machine, the company can rent a new one. It will cost £3000 a year. In analysing the cost–volume behaviour the rental is a ...

(3) To run the firm’s machines, here are two alternative courses of action. One is to pay the operator a base salary plus a small amount per unit produced. This makes the total cost of the operators a ...

(4) As an alternative, the firm can pay the operators a flat salary. It would then use one machine when volume is low, two when it expands, and three during peak periods. This means that the total operator cost would now be a ...

(5) The machine mentioned in (1) could be sold for £8000. If the firm considers retaining and using it, the £8000 is a ...

(6) If the firm wishes to use the machine any longer, it must be repaired. For the decision to retain the machine, the repair cost is a ...

(7) The machine is charged to the foreman of each department at a rate of £3000 a year. In evaluating the foreman, the charge is a …