ACCA Applied Knowledge · Business and Technology · The relationship between accounting and other business functions
Kestrel Ltd's production manager wants to switch from batch production to a continuous flow process for a standardised product with stable, high-volume demand. Which cost behaviour change should the management accountant expect to emphasise in the evaluation?
Continuous flow production normally uses dedicated, capital-intensive plant, which raises fixed costs such as depreciation, while automation and efficiency lower the variable cost per unit. So the accountant should expect a higher fixed cost proportion and lower variable cost per unit.
- ALower fixed costs and higher variable cost per unit
- BA higher proportion of fixed costs and a lower variable cost per unitCorrect
- CNo change in cost structure, since the product is the same
- DHigher direct labour cost per unit because of more supervision
Explanation
Continuous flow processes typically rely on dedicated, capital-intensive equipment, creating higher fixed costs such as depreciation. In return, the variable cost per unit tends to fall because of efficiency and automation. Option A reverses this relationship.
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