Question

Cost Accounting =

Give a numerical example of cost function and analyze this cost function? Discuss how is this cost function used in decision making?

Answer 1

COST FUNCTION: It is a mathematical formula which is used to know how production expenses will change at different otput levels. Or can say, it estimates the total cost of production given a specific quantiy produced.

Formula- cost for given no of units = Fixed cost + Variable cost for the given no of units

Example Q.- XYZ co is a manufacturer of toys, has asked a new study to improve next years budget forcast.

Rent- $500 per month

Electricity-$50 per month

Each Toy Requirement: 1)Plastic-$5

2)Cloth-$2

Find out; A) total cost to manufacture 1200 toys anually

B) total cost to manufacture 1500 toys anually

ANSWER:

Step One- first determine fixed and veriable cost

(Where Fixed Cost- it incurred whwther or not we manufacture

Variable cost- it incurred per unit production)

Cost function=C(x)=FC+VC(X)

where, x- no of units.

PARTICULARS	1200 TOY	1500 TOY
Fixed Cost
Rent (1 yr)	6000	6000
Electricity (1 yr)	600	600
Variable Cost
Plastic ($5 PU)	6000	7500
Cloth ($2 PU)	2400	3000
TOTAL	15000	17100

COST FUNCTION IN DECISION MAKING: The cost information system plays an important role in every organization within the decision-makingprocess. An important task of management is to ensure the control over operations, processes, activity sectors, and not ultimately on costs.