business functions in the value chain as an essential and valued contributor and integrating and co-coordinating the efforts of all business functions in addition to developing the capabilities of each individual business function.
For effectively administering the foregoing themes and to provide the most value in performing their problem-solving, scorekeeping, and attention-directing roles employ a cost benefit approach, the managers should give full recognition to behavioral as well as technical considerations and use different costs for different purposes.
Modern day management accountants are faced with the problem of inadequacies in the traditional costing systems and are constantly on the lookout for newer methods of collecting and allocating costs to different products/services.
For enabling the management accountant to take a stand on the various assumptions in the process of decision making, the cost of the product or service is a key element. Traditionally there are various methods of ascertaining the cost of a particular product or service. One of such methods is collecting the various cost elements and allocating them to the particular product or service is known as unit costing.
A UNIT COST also called AVERAGE COST is computed by dividing some amount of total costs by the related number of units. The units might be expressed as hours worked, packages delivered or automobiles assembled.
A plant manager who used the 2004 cost of $ 80 per unit would underestimate actual total costs, if for year 2005 the total output is below the year 2004 level of 500,000 units. If the actual volume in 2005 is only 200,000 units due to some factors on which the company has no control, actual costs would be $ 22,000,000. Using the unit cost of $ 80 times 200,000 units predicts $ 16,000,000 which underestimates the actual total costs by $ 600,000 ($ 22,000,000 actual cost minus $ 16,000,000).
An over reliance on unit cost in this situation could lead the plant