Chapter 10 - Using Costs for Decision-making

Abstract

This chapter illustrates how costs can be used to assist managers in their decision-making activities. The term “cost behavior patterns” is used to describe the way in which costs behave in relation to the level of activity. Cost behavior patterns depict the way that costs behave in relation to the level of activity. An understanding of cost behavior patterns is necessary in order to perform cost-volume-profit (CVP) analysis. The margin of safety is the difference between the breakeven point and the projected level of activity. Operational gearing is a term used to describe the relationship of the fixed cost to the total cost of an organization. Marginal analysis involves identifying and focusing on only those costs and revenues that will change in the short term as a result of the decision being taken. An attributable fixed cost is one that can be identified with a particular item or activity. Relevant costs are those that will be affected by the decision being taken.