Question

This chapter is about inventory costing and capacity analysis. Specifically, it discusses alternative inventory costing methods (variable, absorption and throughput), alternative income statement format presentations (variable and absorption costing operating income) and alternative denominator-level capacity concepts (theoretical, practical and normal capacities). Let's pretend that you are introducing these concepts to a group of cost accounting students. In three sentences or less, explain why this chapter is important and how to balance management incentives with full and fair inventory disclosure when trying to manage inventory costs. (3 sentence maximum.)

Managers use various methods in determining how costs behave. What are the quantitative methods of cost function estimation and why is determining cost behaviors useful to managers in making decisions? (2 sentence maximum)

Answer 1

For a group of cost accounting students - these concepts about inventory costing and capacity analysis are important for the following reasons:

1. Once they qualify as cost accountants - they will be responsible in various capacities to ensure that inventory costing is as per the standards and appropiate

2. They should be aware of various methods available to be able to help management take the right decisions for live contracts for which decisions needs to be taken based on cosst-benefit analysis

3. Careful and consistent application of costing methods can help managment in balancing full and fair inventory disclosures while managin costs involved.

The below are the quantitative methods of cost function estimation:

a) Industrial engineering method

b) Account analysis mehtod

c) Conference method

d) Quantitiative analysis mehtod

Cost behavior analysis is the study of how certain costs behave in a business. Understanding cost behavior is crucial for managers so they can control costs effectively.

The first step in analyzing costs is understanding and measuring key business activities. Activity levels are expressed in financial terms and can be in sales dollars, miles driven, classes taught, etc. The activity level should be correlated with changes in costs. The activity index identifies the activity that causes changes in the behavior of costs. This allows managers to make decisions to further control costs. There are three types of costs: variable, fixed, and mixed.