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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Lakeshore Printing's management accountant notes that as output rises beyond normal capacity, the cost per extra unit initially falls due to learning and bulk purchasing but later rises because of overtime premiums and machine breakdowns. Which statement best describes the implication for cost behaviour analysis?

Linear cost behaviour holds only within a relevant range of activity. Because the extra cost per unit changes as output moves beyond normal capacity, forecasts that extrapolate outside that range may be unreliable.

  1. AThe assumption of a linear cost function is valid only within a relevant range, so forecasts outside it may be unreliableCorrect
  2. BVariable cost per unit is constant at all output levels, so linear forecasting is reliable throughout
  3. CAll costs become fixed once output exceeds normal capacity
  4. DTotal costs will behave in a perfectly step fixed pattern at all output levels

Explanation

Linear cost estimates assume constant unit variable cost and fixed costs within a relevant range of activity. The case shows unit cost changing outside normal capacity, so extrapolation can mislead. The other options contradict the described pattern.

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