ABSTRACT
This chapter explains the concept of opportunity costs and risks in the management accounting process. Cost objectives can be divided into three broad categories: costs for inventory valuation, costs for decision making and costs for decision control. In manufacturing organisations, the calculation of product costs consists of three elements: direct material, direct labour and manufacturing overhead. The chapter explores role of cost information in decision management and decision control. In an organisation that produces a wide range of products or jobs, and where each order is unique and requires different amounts of material, labour, and overhead, the cost of each order must be calculated separately. Knowledge of how costs vary with different levels of activity or volume is essential for decision-making. Variable costs vary in direct proportion to the changes in activity. A distinction between fixed and variable costs must be made relative to the period under consideration. Over a sufficient long time virtually all costs are variable.
