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Using Costs in Decision Making

In: Business and Management

Submitted By grace28
Words 793
Pages 4
Grace Manuella P
327023
Accounting IUP
Using Costs in Decision Making
Cost information and the important role it plays in strategy development and in monitoring the results of implementing the strategy. The use of cost information is pervasive throughout decision – making situations.
Pricing
Cost information is used to deciding price by organizations in two ways : * In markets where the organization faces a market – determined price; * In markets where the organization can set its price.
Product Planning
Target costing is used to focus efforts in product and process design on developing a product that has a good profit potential in view of market requirements.
Budgeting
Budgeting is a management accounting tool that projects or forecasts costs for various levels of production and sales activity.
Performance Evaluation
Managers compare the actual results from the budget period with expectations that were reflected in the budget to assess how well the organization did in light of its expectations.
Contracting
In cost reimbursement contracts organizations are reimbursed their cost plus an increment for the goods or service they provide under the contract. Governments are frequent and large-scale users of cost reimbursement contracts. Because of the potential for cost manipulation, governments will often prescribe the costing standards that organizations must use when computing reimbursement costs.
A variable cost is one that increases proportionally with changes in the activity level of some variable. Because there are many possible types of variables, for convenience, a common term used for a variable that causes a cost is cost driver. The variable cost formula is
Variable cost = Variable cost per unit of the cost driver X Cost driver units
A fixed cost is a cost that does not vary in the short run with a specified activity. A fixed cost

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