Cost Relationship Behaviors

The Cost Relationship and Behaviors can affect manager’s decisions and prerogatives in different ways. Cost behavior is the sensitivity of costs to variance in production or sales volume. The range of output or sales over which cost behavior patterns remain unaffected is called the relevant range. Cost behavior is the way of explaining the receptiveness and changes in cost with relation to variances in sales and production. These enable a company to determine cost volume relationships and also to effectively manage its operations as it provides important and comprehensive data. In addition, they assist in business forecasting, budgeting and product differentiation.

In the case of Guillermo Furniture Store, a major exercise in cost behavior and relationship analysis is cost allocation.

Cost Allocation refers to Assigning indirect costs to cost objects in proportion to the cost object’s use of a particular cost-allocation base.

A clearly defined and identifiable allocation of costs would enable accountants to effectively perform their functions. Costs are usually allocated into four main categories which are manufacturing departments, service departments, customers and products and services. They can also be categorized as direct and indirect costs.

Subsequent to cost allocation, the decision makers can monitor cost relationships and their behavior in each of the various departments and situations. Guillermo Furniture Store has to monitor the costs for its products and services as well as the cost of its manufacturing and service departments. In addition, the company has to make sure that customer profitability and cost are being tracked. Over a period of time, decision makers would be in a position to determine cost drivers based on customer profitability and costs monitored.