Cost accounting systems are very important in the operation of any business because there is a cost associated with any and every action. The identification of these cost is what is referred to as cost drivers which are outputs of resources of activities that requires the use of resources therefore incurring cost (Horngren, Sundem, Stratton, Burgstahler, Schatzberg, 2008, p. 46). Examples of cost drivers associated with Aunt Connie??™s cookie business is production, marketing, and unit utilization.
When evaluating cost drivers it is more beneficial to distinguish between fixed cost and a variable cost. A fixed cost is ???a cost that is not immediately affected by changes in the cost-driver level (Horngren et at., 2008, p.48). Some of the fixed cost for Aunt Connie??™s business is advertising, equipment extensive operations, and the cost of buying the additional manufacturing unit from the competitor. Most often, when a company invests in advertising there is a set budget to operate from and those funds are used to promote the company until exhausted.
The cost of equipment and facilities are typically classified as fixed cost because output has no direct relationship of a possible change in price of these expenses. Using an equipment extensive operation also diminishes some of the costs for labor. ???A variable cost is a costs that changes in direct proportion to changes in the cost-driver level??? (Horngren et al., 2008, p.48). The variable cost associated with the business are the distributor margin and production capacity. Both of these variables are directly related to volume and price. Cost accounting systems are also efficient for illustrating the success of a business.
Two key factors in determining the success of a business are the breakeven point and the contribution margin. ???The breakeven point is the level of sales at which revenue equals expenses and net income is zero??? (Horngren et al., 2008, p.
54). At the breakeven point a company is neither loosing or gaining revenue and its effects weigh heavily on the contribution margin. ???A contribution margin is a term used for either unit contribution or total contribution margin??? (Horngren et al., 2008, p. 56). The contribution margin is a direct correlation of sales and revenue.
Horngren, C., Sundem, G., Stratton, W., Burgstahler, D., Schatzberg, J. (2008).
Introduction to Management Accounting. Upper Saddle River: Prentice Hall.