Question

why do you believe that accountants use the cost concept?

Answer 1

Cost concept is used by accountants for various managerial reasons and application in decision making. Below is the purpose of cost concepts used by accountants.

· Cost concepts are useful in decision making. For example Relevant cost , Opportunity cost, Traceable fixed cost is used in decision making like make vs. buy, evaluation of special orders, shutdown vs. continue of segments or product lines

· Cost concepts are useful in evaluation of investments. For example : Incremental cost savings between 2 alternatives, sunk cost ,etc

· Cost concepts are useful in pricing. For example, Variable cost pricing, Full cost pricing, Absorption cost pricing, product pricing

· Cost concepts are useful in profitablity analysis. For example: Variable costs and fixed costs are used in cost volume profit analysis and break even analysis.

· Cost concepts are useful in valuation of inventory. For example: Inventory is valued at product cost and period cost is charged to Income statement

· Cost concepts are useful in budgeting exercise. For example standard costs are used for budgeting exercise. Evaluation of actual performance can be done based on controllable and uncontrollable cost.