QUESTION THREE a) Explain why some production costs must be assigned to products through an allocation process. Give two examples of such costs. Would such costs be classified as direct or as indirect costs? (10 marks)

b) Company A has aggressively invested in automation, and this has resulted in a shift towards greater fixed costs in its cost structure. Whereas Company B continued with its labourintensive manufacturing systems. In a time of decreasing sales, which company will tend to realize the rapid decrease in profits? Explain your answer using the concept of 'operating leverage'. (10 marks)

c) The production manager of a company is arguing with the financial controller that variable costs are always relevant and direct costs; and fixed costs are always irrelevant and indirect. Given the nature of these cost classifications: fixed/variable, relevant/irrelevant, direct/indirect, who do you agree with? Justify your answer with examples. (20 marks)