Good Example Of Essay On Contrast Relevance, Cost Behaviour And Cost Type

Relevance means that information must be available and useful to its users. The Generally Accepted Accounting Standards (GAAP) requires that financial statements must be relevant, meaning that users such as investors and creditors must be able to read and understand the information contained in the financial statements. That is the reason why all financial statements are prepared using the same format across all nations. Financial statements which are not relevant to users are not useful for decision making.
Cost behaviour means how costs change due to changes in a related activity. The change in costs must be related to certain activity in order to be called cost behaviour. Cost behaviour is very crucial to managers as they aid managers in decision making. Some of the managerial decisions that are influenced by cost behaviour are: setting selling prices, predicting cash flows, planning dividend pay-outs and helping in preparation of budgets. Cost behaviour leads to rise of four types of costs namely; fixed costs, variable cost, semi- variable cost and step-variable costs.
Fixed costs are costs which do not vary with production. They remain constant irrespective of the level of production within a relevant range. An example of fixed cost is rent which must be paid monthly irrespective of the level of production. Variable cost on the other hand is the cost that changes with production. The more the production, the more the variable cost per unit. An example of variable cost is material cost. If more units are used to produce a particular output, then more variable cost of that particular material will be used. Variable cost varies in a linear manner within a relevant range. Semi-variable costs are costs which are neither fixed nor variable. An example of semi-variable cost is electricity because it has a fixed component and a variable component. The fixed cost component is constant but the variable component varies with the number of units used by a consumer. Step-variable cost refers to the behaviour of total cost of an activity at different levels of activity.
Cost type is a word used in management accounting to mean a code. Cost types are codes used to identify items to make them easily accessible. The codes must have a meaning to the users and must be easy to understand. For example, if we want to give Sales to a customer a code we can use S01 meaning sales to customer number one.