The importance of costs. (Need different writer for 534474.) Essay

The importance of costs. (Need different writer for 534474.) - Essay Example This paper seeks to discuss the importance of understanding ‘cost’ from the managers’ perspective. Introduction The managers are involved in decision making of various types in the business, and the understanding in the following lines facilitate easy grasp of the concept of costing in relation to business management. 1. Behavior of cost The cost could be classified basically into variable and fixed or direct and indirect. All variable costs directly involved in manufacturing of a product or rendering services include direct material, labor or overheads which are variable in nature in tune with the level of production. Whereas, the ‘indirect costs’ have a tendency to remain constant within a range and may be called as ‘capacity costs’. 2. The objective or the purpose for which the cost is being considered There are various decision making situations in a business which include pricing, make or buy, sub-contracting and capital investment a part from cost control, budgeting and variance analysis which are done on a regular basis. The analysis of data and application of the costing techniques vary according to the objective. The intervention of the manager for decision making purposes is involved mainly in the situations like pricing, make or buy, outsourcing, sub-contract and capital investment. ... In this paper, while discussing about the various methods, the influence of the variable and fixed costs in the decision making and the appropriate situations for using a particular method of costing is considered for better understanding. 4. Opportunity cost In the final count, the internal calculations need to pass the test of ‘Opportunity Cost’ because, any decision which is at least not compatible to the ‘opportunity cost’ may have to be discarded, because the opportunity cost it is not a simple calculation of future costs but, involves imputed costs. The opportunity cost means â€Å"The  cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action†. (Investopedia, 20110) Generally speaking, the managerial decision is not introvert in nature, but takes into account the economic justification considering the external environment and the margi nal efficiency of the capital needs to justify a proposal. For instance, if the opportunity cost of capital does not justify a management decision, it signifies that the opportunities elsewhere available would yield superior returns on the capital invested. Methods of costing and its relevance to decision making The method of costing to be adopted depends on the nature of manufacturing activity. However, the paper is not dealing with the methods per se, in relation to the procedural aspects related to Job Costing, Batch Costing or Process Costing, in line with the objective of the study. The analysis is rather with reference to managerial accounting perspective for the purpose of decision making. For instance, Rama Gopal, C. (2009, p. 473) states