Cost Concepts

2 Pages 460 Words

Managers have to understand cost concepts to be able to answer several questions for instance what are the organizations controllable costs, how are fixed and mixed cost portions determined and which costs are relevant to pricing.
Fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity. Fixed cost can be classified as discretionary or Capacity. Costs that can be avoided when a company shuts down are called avoidable costs. Common examples of fixed cost are rent, insurance, and interest expenses. A variable cost is a cost that varies, in direct proportion to changes in the level of activity of the organization. A variable cost is constant per unit. Step costs are constant within a range of activity but different among ranges of activity for example supervisor salaries. Mixed costs are cost that vary but at the same time are fixed. A good example of fixed cost may be repair and maintenance. Total costs for a hospitality organization are all of the aforementioned cost concepts added together.
It is simple to use the high/low method to determine the elements of mixed cost. For a more detailed method use the scatter diagram. In addition regression analysis would be a mathematical approach. Indifference is when the level of activity at which the period cost is the same under either fixed or variable cost. Direct costs are costs that can easily and conveniently be traced to the particular cost object under consideration. Indirect cost cannot easily and conveniently be traced to the particular cost object under consideration. Overhead cost are considered to include all costs other than direct costs so indirect costs would be regard as overhead costs.
There are two types of cost allocation single allocation base approach and the multiple allocation base approach. A differe...