Question

Mel Gibbeson has recently graduated from a business school and has joined the family business as an accountant. At the first management meeting with production, marketing and sales, a great deal of time was spent discussing the unit cost of products. Required: What kinds of decisions can managers make using the unit cost information? (10 marks question)

Answer 1

Managers can make several financing and accounting decisions using the unit cost information. First of all decision making with regards to marginal costing can be made. Marginal costing, also known as cost-volume-profit analysis, is the impact on the cost of a product when an additional unit is added in production. This analysis will enable making short-term economic decisions as the contribution margin of a product determines the overall level of profit. Managers can also determine the break-even point and this will help with decision making with regards to pricing. Decisions with regards to mark up on costs can be made by determining the trend of cost data and sales data.