Economic Decision Making Using Cost Data

Chapter 4

What Your Cost Accountant Can’t Measure: The Economic Theory of Production and Cost

Having determined the relevant revenue associated with a decision, the manager must determine relevant cost. The critical theme of this book is that cost accounting methods rarely report the unit cost figure relevant to the manager’s decision.

We might begin by asking what “unit cost” means. Marketing managers, for example, would be ill-advised to make pricing decisions without knowing what it would cost to produce the output. Although one might ask a cost accountant to define unit cost, it is more telling to pose it to the decision maker. The name “unit cost” implies the cost of making a unit of output. Therefore, if told that unit cost is $15, the ...