Slides for Class # 10 on Cost Concepts and Decision Making

March 21, 2002A cost accounting system records expenses

incurred by an entity. It posts these expenses to the various cost accounts that appear in

the expenses section of the income statement. But beyond this, a cost accounting

system configures cost reports ordered by managers. These cost reports contain information managers use to set prices

charged for services and control the organization's costs.

Concepts of Costs• Traceability

– Direct– Indirect

• Cost behavior– fixed cost– variable cost– semi fixed cost– semi variable cost

• Controllability– Cost the responsible manager can control; and cost he/she

cannot control• Future Costs (also called Planning Cost)

– Avoidable cost; Sunk cost; Incremental cost; Opportunity cost

Cost Measurement • Direct and Indirect Cost

– Methods for allocating Indirect Cost• step-down method• double distribution method• simultaneous-equations method

• Variable and Fixed Cost– Methods for estimating variable and fixed cost

• visual fit• high-low• regression

– Data checks

Break-Even Analysis

• Traditional Applications• Multiple Payer Model• Special Applications

– Computation of marginal Profit of Volume change• Profitability Index

– Rate-setting analysis

• Evaluating Incremental Profit of New Business