Question

How might each of the costing methods be used in managerial decision-making?

How is overhead cost explained?

Answer 1

importance of costing in managerial decisions :-

While it may sound trivial, knowing how much it costs to make a product is extremely useful information about your business. Often, small-business owners do not realize how expensive production can be, and only turn to costing techniques when trouble is on the horizon. By understanding the importance of costing before you run into trouble, you can use these techniques to do more than just set a normal sales price; costing can help you make other data-driven decisions about your business process.

Pricing Decisions
Knowing how much your company spends to produce a unit of product is invaluable when figuring out the sales price. If you plan on competing on price, you will want to ensure that your product is priced lower than that of your competitors, but if you sell your product for less than its cost, you won't be in business for very long. While costing is useful for setting a normal sales price, it is also useful for determining whether or not to take special orders at lower prices. In many cases, fixed costs of production, such as rent and management salaries, are already covered by normal production. Companies in that situation can accept a lower price than normal in order to win a special order. Costing techniques allow you to determine how long you can go and still come out with a profit.

Sell or Process Further
Costing methods are important when companies are deciding whether to sell an intermediate product or to process the product further. For example, a dairy has many options to consider when determining what products to bring to market. The dairy could sell raw milk to a creamery, process the milk into pasteurized dairy products, make butter or ice cream, or produce cheese. By using a costing technique called relevant cost analysis, the dairy's owner can determine what amount of processing is the most profitable for the dairy.

Company Performance
Because costing methods have uniform rules, managers rely on the consistency of costing techniques to evaluate performance across companies. For example, if you are the manager of a small soda business, you can look at a publicly-traded competitor for a rough ballpark estimate of how that company is doing. By examining the company's filings, you can determine how many units of product the company sold and at what cost. You can then determine the cost per unit, and compare this to your company's cost per unit. While a larger company could be expected to have a lower cost per unit than a smaller company, figuring out if the two companies are in the same ballpark can be worthwhile.

b. Overhead costs, often referred to as overhead or operating expenses, refer to those expenses associated with running a business that can’t be linked to creating or producing a product or service. They are the expenses the business incurs to stay in business, regardless of its success level.

b.

Overhead costs are all of the costs on the company’s income statement except for those that are directly related to manufacturing or selling a product, or providing a service. A potter’s clay and potting wheel are not overhead costs because they are directly related to the products made. The rent for the facility where the potter creates is an overhead cost because the potter pays rent whether she’s creating products or not.

A company’s overhead costs depend on the nature of the business. A retailer’s expenses will be different from a repair shop or a crafter’s. Typical examples include:

Rent
Utilities
Insurance
Salaries that aren’t job- or product-specific
Office equipment such as computers or telephones
Office supplies

Overhead costs can be broken down into three types:

Fixed
Variable
Semi-variable
Fixed expenses are the same every month – such as rent. Variable costs increase or decrease, depending on how busy the business is. This could include wages for certain employees. Semi-variable costs are those that are incurred regardless of the activity level, but which might increase as business gets busier. For example, an accountant in the U.S. always use printer toner, but might use more of it in the first quarter of the year when preparing and printing tax forms for clients.