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VARIABLE COST FIXED COST - Chapter2 Basic Cost Management...

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Chapter2: Basic Cost Management Concepts and Accounting for Mass Customization Operations Basic Cost Management Concepts: Different Costs for Different Purposes An understanding of cost concepts is absolutely critical to cost management. Moreover, different perspectives on costs are important in different managerial situations. The phrase different costs for different purposes is often used to convey the notion that different characteristics of costs can be important to understand in a variety of managerial circumstances. In this section, we will briefly discuss the work of several cross-functional management teams at Comet Computer Corporation, each of which is focusing on a particular management challenge. Through our discussion of these cost management teams' work, we will explore some of the key cost terms and concepts used in managerial accounting and cost management. The Cost Driver Team One of the most important cost classifications involves the way a cost changes in relation to changes in the activity of the organization. Activity refers to a measure of the organization's output of products or services. The number of automobiles manufactured by General Motors , the number of days of patient care provided by Massachusetts General Hospital , and the number of insurance claims settled by Allstate are all measures of activity. The activities that cause costs to be incurred are also called cost drivers. L earning O bjective 7 Understand the importance of identifying an organization ʼ s cost drivers. One of Comet Computer Corporation's cost management teams was formed to examine the various costs incurred by Comet. The team consisted of an engineer, a production manager, a purchasing manager, and a managerial accountant. After identifying the various costs incurred by Comet, the team was charged to go on to identify the cost drivers upon which various types of costs depend. 8 A cost driver is a characteristic of an activity or event that causes costs to be incurred by that activity or event. In most organizations, different types of costs respond to widely differing cost drivers. For example, in a manufacturing firm, the cost of assembly labor would be driven by the quantity of products manufactured as well as the number of parts in each product. In contrast, the cost of machine setup labor would be driven by the number of production runs. The p. 50
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cost of material-handling labor would be driven by material-related factors such as the quantity and cost of raw material used, the number of parts in various products, and the number of raw-material shipments received. Cost drivers in the airline industry are complex. The capacity of an airplane and its passenger load drive costs, but so do a variety of other factors related to the airline's operations.
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