“As production volume changes, some costs may increase or decrease and other costs may remain stable, but specific costs behave in predictable ways as volume changes. This concept of predictable cost behaviour based on volume is very important to the effective use of accounting information for managerial decision making.” Do you agree? Justify.
Understanding the behavior of the costs is a major phenomenon in case of the managers of an organization. This is because the material factors pertaining to decision making hugely depends on the trends in which the particular costs react. The knowledge about the exact way in which the costs behave and the degree by which they are affected by the income tax and other related financial components allow the managers to impart their duties well.
This particular study aims to develop a perspective into the question that whether the concept of predictable cost behavior based on the changes in the volume of production is crucial to the effective utilization of financial data for the decision making by the management body or not. Thus, the essentialities of predictable costs has been
The fixed costs refer to those costs that remain fixed in terms of the total cost but vary in terms of the unit cost. The potential examples of the fixed costs may be in the nature of rent, property taxes or depreciation related to the building. Furthermore, the variable costs refer to the costs that change with the change in the volume of production but remain fixed in terms of per unit amount. The potential examples of variable costs are unit level costs like factory costs, costs related to energy to run factory machinery (Collier, 2015).
Thus, a particular cost is treated as a variable or a fixed cost based on the behavior of that particular cost in respect to change in the volume of production. For instance, the labor component might be referred to as a variable cost. However, actually direct labor might have features that are similar to that of fixed cost in most of the companies. This is due to the fact that the companies are not willing to let go of the highly skilled workers in a shorter time period and the labor associations are becoming successful in an accelerated rate in negotiation of the long-term contracts. This makes the size of the work force difficult to be adjusted in terms of the volume of sales or production. The big automaker companies like Ford opts for cutting its workforce as a part of the cost reduction and increasing the profit strategy (Stadtler, 2015).
The primary need in any organization is the segregation of costs according to their particular categories, which is a complicated process. There are certain kinds of costs that change only when the volume of production changes by a huge scale. The costs related to the batches of production or the batch level costs change with the exact count of produced batches and not with the change in per unit of product. The product level costs in regards to the quality of the product may change with the introduction of the new products in the market. These kinds of costs are essentially known as step costs. Step costs may be treated like a fixed cost or a variable cost (Goetsch & Davis, 2014).
Mixed costs are the costs that comprises of both fixed and variable components. It is very difficult to ascertain the very nature of this type of cost as the change in this particular cost with the change in volume of production has to be identified by segregating the cost into fixed and variable units (Holzhacker, Krishnan, & Mahlendorf, 2015).
The present trend in the market has been that the direct labor or the other related workforce is replaced by the implementation of the artificial intelligence technology in the form of automated equipment. This particularly has resulted in the increase in the fixed costs and the decrease in the variable costs. Though there are numerous benefits of the particular process of automation, its impact on the workforce that is employed in an organization in regards to the decision making by the managers cannot be ignored (Cannon, 2014).
Relevant costs are the costs that can be ignored or not considered by opting for the alternative cost, that is available. Relevant costs are also known as incremental or differential costs. In regards to the production, variable costs are much more referred to as they change with the change in the level if production. However, it should be noted here that the variable costs remain fixed between two optional costs while the fixed costs may change between the alternatives (Hollensen, 2015).
Other factors that affect the costs can be listed down as follows:
The impact of taxes on costs can be understood with the consideration of the following factors:
United Airlines being the second largest airways company in the world had filed for bankruptcy in the year of 2002. This is because the airlines company had higher fixed costs that made it impossible to reduce the costs quickly in alignment with the reduction in revenue. The fixed costs had formed a large part of the operating expenses that made the company go bankrupt in the absence of increased revenues.
The type of cost information that is required by the management for making essential decision-makings can be understood from the following table (Gitman, Juchau & Flanagan, 2015):
|
Information required from the different costs |
Possible utilization of such information by the management |
|
The cost in terms of one unit of a product or service |
Determination of the price of the product, Production planning, and related cost control, administration of the product portfolio and the measurement of the performance. |
|
The cost related to a factory or department |
Determination of the strategy for improving the quality of the process of production |
|
The costs related to the wage expenses regarding a batch of product |
Planning the production process and the particular policy of wages |
|
Activity related costs |
Profit estimation and determination of the particular procedures in regards to the growth of the company |
|
Cost analysis |
Decision in regards to the process of cost reduction, decisions in regards to the management of the product and the particular methods to be adopted for ensuring the growth of the company |
The different cost related decisions taken by the managers are listed as follows:
Therefore, as it can be concluded from the literature that has been discussed in the preceding paragraphs, the knowledge of the trends in which the particular costs will react is very important for the managers. The types of cost information required and the decisions based on them has also been discussed in order to understand that cost behavior on the basis of changes in the volume of production is very important for managerial decision making
References
Cannon, J. N. (2014). Determinants of “sticky costs”: An analysis of cost behavior using United States air transportation industry data. The Accounting Review, 89(5), 1645-1672.
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Goetsch, D. L., & Davis, S. B. (2014). Quality management for organizational excellence. Upper Saddle River, NJ: pearson.
Hollensen, S. (2015). Marketing management: A relationship approach. Pearson Education.
Holzhacker, M., Krishnan, R., & Mahlendorf, M. D. (2015). The impact of changes in regulation on cost behavior. Contemporary Accounting Research, 32(2), 534-566.
Karelaia, N., & Reb, J. (2014). Improving decision making through mindfulness.
Laudon, K. C., & Laudon, J. P. (2016). Management information system. Pearson Education India.
Stadtler, H. (2015). Supply chain management: An overview. In Supply chain management and advanced planning (pp. 3-28). Springer Berlin Heidelberg.
Vasu, M. L., Stewart, D. W., & Garson, G. D. (Eds.). (2017). Organizational Behavior and Public Management, Revised and Expanded. Routledge.
Wangrow, D. B., Schepker, D. J., & Barker III, V. L. (2015). Managerial discretion: An empirical review and focus on future research directions. Journal of Management, 41(1), 99-135
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