The use of job costing as a tool for the pricing and cost control decisions in the printing industry: the case of Société de Presse et d'Editions (SOPECAM)

Relevant, irrelevant, differential, opportunity and sunk costs:

In this situation, the nature of the cost will be tied to its usefulness in the decision making process.

Differential or incremental cost

Incremental analysis is a valuable tool in accounting as in finance and economics. Incremental simply means additional. Generally in the business environment, we are faced with many alternatives ways of performing an activity. A differential analysis is therefore essential to select which alternative to take on. This differential analysis focuses on the costs and revenues associated to each alternative. A differential cost is therefore the difference in cost between any two alternatives, so it is not a constant figure; it depends on the couple of alternatives selected. It refers to the cost that may be avoided if the alternative is rejected so it can be called avoidable cost.

Opportunity cost

As outlined by Garrison and Noreen (2003), it is a concept that is not usually entered in accounting records; nevertheless, every manager when making decisions must consider it. Samuelson and Nordhaus^11(*) (2000) state that this concept is much broader when defined in economic terms, but it refers to the potential benefit that is given up when one alternative is selected over another. It is the cost of the forgone alternative.

Sunk cost

Garrison and Noreen (2003) define it as a cost that has already been incurred and that cannot be changed by any decision made now or in the future. This can also be termed unavoidable cost. It is not very relevant when making decisions as it cannot be changed or avoided through a decision made by management; examples of this are the cost of acquiring fixed assets.

Controllable and uncontrollable costs.

When decentralising an organisation and delegating the authority to its various segment managers it becomes easier to evaluate and judge their respective performances. In order to achieve this task, senior management needs to identify the costs that can be monitored by those managers. Such a situation leads to a new classification of costs as either controllable or uncontrollable.

Controllable costs

Anthony & Reece ^12(*)(1975) states that an item of cost is controllable if the amount incurred in (or assigned to) a responsibility centre is significantly influenced by the actions of the manager of the responsibility centre. Controllable costs refer to all those cots that are under a manager's authority, it means that this manager has the authority to modify them depending on his plans. As an example a manager may have authority over supervisors employed in his department, but he may not be able to fire or hire them, so the supervisory costs of that department will not be classified as controllable costs for the department's manager.

Uncontrollable cost

This is simply the contrary of the controllable cost. It is one that is not under the regulation of a particular manager as the supervisory cost of the previous example.

This classification of cost as either controllable or uncontrollable must be used alongside with budgeted costs. These budgeted costs will serve as standards for comparison against the actual performance. In order to evaluate a manager's performance, we must have a yardstick or a measuring rod that will ease the process and this measuring rod must be a Cost Budget established at the beginning of the accounting period.

* ¹¹ Samuelson, P.A., & Nordhaus, W.D., (2000), Economics (16^th edition), McGraw-Hill, New York.

* ¹² Anthony, R.N., & Reece,J.S. (1975), Management Accounting, Text and Cases (5^th edition), Irwin, Homewood.