Daniyyah Damar

344161
1. Some cost related concepts used in management accounting are:
Variable cost that increases proportionally with changes in the activity
level of some variable
Fixed cost is a cost that does not vary in the short run with a specified
activity. The defining characteristic of a fixed cost is that it depends on
the amount of a resource that is acquired rather than the amount that
is used
Sunk cost is a cost that results from a previous commitment and
cannot be recovered. For example, lease payment required by longterm lease.
Opportunity cost is the maximum value forgone when a course of
action is chosen
Relevant cost is a cost that will change because of some decision. For
example, Alex has bought a discount voucher to XYZ dept. store, but
found out that even with the discount, for similar product it is cheaper
in ABC dept. store. Therefore, the next time Alex goes to dept. store he
would have gone to ABC knowing that the discount voucher for XYZ is
irrelevant.
Avoidable cost is a cost that can be avoided with a course of action.
2. Cost information support management activities such as
Pricing, cost information is used by organizations in two ways. In
market-determined price, cost information is used to decide whether
its cost structure will allow it to compete in terms of profitability. If the
organization could set its price, organization will set a price that is an
increment of its product cost
In product planning, organization use target costing to focus effort in
product and process design on developing a product that has a good
profit potential in view of market requirements.
In budgeting, cost information is used as a management accounting
tool that projects or forecasts costs for various levels of production and
sales activity.
In performance evaluation, managers compare actual results from the
budget period with expectations that were reflected in the budget.
3. To understand the effect of volume changes in cost and profit, manager could
use Cost-Volume-Profit analysis. For example, Rose Furniture Company wants
to make chairs and after some calculation, the fixed cost to produce the chair
is $400,000 with variable cost at $80/unit and the selling price is $300/unit.
To find out how many units should the company manufacture to breakeven,
the management could calculate it as below

unit sold=

0+400,000
=1,819 units
220

unit sold=

target profit + cost

contribution margin

In

addition,

to

get

20%

cost
unit sold=
contribution margin20 price
unit sold=

revenue

the

company

needs

to

sell

400,000
=2,500 units
22020 300

Thus, with CVP analysis managers could compute the effect of volume
changes in cost and profit
4. The role of cost in situations such as
In make-or-buy decision, the important cost concept is sunk cost where
the historical value is not relevant, thus need to be exclude from the
equation. For example, Anjlee Catering Service owner faces a dilemma
whether she should outsource her catering food preparation and
delivery or do it by herself. By outsourcing, the catering is estimated to
increase her sales by $150,000/year with 20% contribution margin. She
also owned a truck used to take and deliver the food from suppliers
and consumers, but she promised that the truck will be given to the
driver when she doesnt need it anymore, so the depreciation and
salvage value of the van is a sunk cost and irrelevant in the decision
making process.

The organizations could choose to abandon a product when it is

unprofitable by calculating the fixed cost that are directly attributable
to the product and avoidable fixed costs in every line that the company
wants to drop.

The order costing problem deals with estimating the cost of unique
order and computing floor price or the minimum price that a company
would consider for the order. This decision use the incremental cost
concept which is the variable cost of a unit of production with two
differences, first variable cost per unit may change as production
volume changes and second, if the cost is a step variable, treating the
cost as variable cost will lead to estimation error.