Slides for Class # 10 on Cost Concepts and Decision Making March 21, 2002 A cost accounting system records expenses incurred by an entity. It posts these expenses to the various cost accounts that appear in the expenses section of the income statement. But beyond this, a cost accounting system configures cost reports ordered by managers. These cost reports contain information managers use to set prices charged for services and control the organization's costs.

Concepts of Costs Traceability –Direct –Indirect Cost behavior –fixed cost –variable cost –semi fixed cost –semi variable cost Controllability –Cost the responsible manager can control; and cost he/she cannot control Future Costs (also called Planning Cost) –Avoidable cost; Sunk cost; Incremental cost; Opportunity cost

Cost Measurement Direct and Indirect Cost –Methods for allocating Indirect Cost step-down method double distribution method simultaneous-equations method Variable and Fixed Cost –Methods for estimating variable and fixed cost visual fit high-low regression –Data checks

Break-Even Analysis Traditional Applications Multiple Payer Model Special Applications –Computation of marginal Profit of Volume change Profitability Index –Rate-setting analysis Evaluating Incremental Profit of New Business