Chapter 8 - Flexible Budgets, Overhead Cost Variances, and Management Control - Assignment Material - Questions - Page 316: 8-11

One caveat that affects whether a production-volume variance is a good measure of the economic cost of unused capacity is that it assumes a linear relationship between production volume and fixed costs. In reality, fixed costs may not increase linearly with production volume. Some fixed costs may remain constant within a certain production range but could increase sharply if production falls outside that range. This can lead to an inaccurate representation of the economic cost of unused capacity.

One caveat that affects whether a production-volume variance is a good measure of the economic cost of unused capacity is that it assumes a linear relationship between production volume and fixed costs. In reality, fixed costs may not increase linearly with production volume. Some fixed costs may remain constant within a certain production range but could increase sharply if production falls outside that range. This can lead to an inaccurate representation of the economic cost of unused capacity.