Economic Decision Making Using Cost Data

According to economic theory, production and costs follow patterns that are common to many firms. In a world of perfect information, managers could utilize this cost data to make production decisions and set prices. In the real world, however, much of this information remains unknown.

Common accounting practices are designed with record-keeping as the end goal rather than to present an accurate assessment of opportunity cost. Many times, managers do not recognize the difference between opportunity costs and accounting costs and, instead, rely upon the readily available accounting costs to make their decisions. This often leads to suboptimal decisions. The purpose of this book is to present production/cost theory, review various cost accounting methods and demonstrate how they may distort production and pricing decisions in light of the differences between accounting costs and economic theory.