Fixed manufacturing costs refer to costs that do not vary with the level of production activity within a relevant range. These costs include expenses such as depreciation, rent, property taxes, and salaries of permanent employees in the production facility. Their primary purpose is to ensure the availability and operational readiness of production facilities, regardless of fluctuations in production levels.
(A) Correct – To ensure availability of production facilitiesFixed manufacturing costs are incurred to maintain and operate production facilities, ensuring that they remain functional and available for production when needed. These costs exist even if no units are produced, emphasizing their role in sustaining the production infrastructure.
(B) Incorrect – To decrease direct expenses related to productionFixed manufacturing costs are unrelated to direct expenses, such as raw materials and labor, which vary with production volume. Instead, they remain constant regardless of output levels.
(C) Incorrect – To incur stable costs despite operating capacityWhile fixed costs remain stable within a relevant range, their primary purpose is not just cost stability but ensuring production facilities' availability and functionality.
(D) Incorrect – To increase the total unit cost under absorption costingUnder absorption costing, fixed manufacturing costs are allocated to units produced, affecting per-unit cost calculations. However, this is an accounting treatment rather than the core purpose of fixed manufacturing costs.
IIA’s Global Internal Audit Standards – Managing Resources Effectively
IIA’s Guide on Cost Management and Internal Control
Highlights the role of cost structures, including fixed costs, in ensuring business continuity.
IIA’s Practice Advisory on Cost Accounting Controls
Breakdown of Answer Choices:IIA References and Internal Auditing Standards:Would you like further clarification on any point?
