Accounting and Decision Relevance

• Accuracy may not always be desirable as managers could prefer to use costing systems to direct behaviour, rather than bring about neutrally informed decisions (”behaviourally-oriented cost systems”).
• Systematic upward bias - Revenue managers could overstate product costs so that sales managers in competitive pricing situations set the price to (what they think is) the marginal cost. In reality, the price is above MC, creating more revenue for the managers.
• Systematic downward bias - managers use target costing to understate product costs to encourage innovative ways of driving costs below the currently attainable standards.
• Low sophistication - firms have a low number of cost pools to direct attention to crucial cost drivers. They sacrifice the accuracy of allocation for some costs but create an incentive to simplify product designs to maintain long-term competitiveness.
• A cost driver is an activity that causes the total cost to change
• The relevant range is a band of activity within which operations are normally expected to occur or, alternatively, the range of activity within which the presumed cost structure and relationships are expected to remain valid
• The relevant range is important to the analysis because the cost structure and cost behaviour assumptions are only valid within this expected range of activity
• Flexible costs are resources that are acquired as used or needed; their acquisition does not require a long-term commitment
• Committed costs are resources acquired in advance of when they are used, and are contractually fixed
• Activity Measure - a quantitative measure of how much activity is performed
• A unit cost is an average cost for one level of activity