Business – 5.4 Costs – Cost information | e-Consult
5.4 Costs – Cost information (1 questions)
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Accurate cost information underpins reliable performance measurement and strategic choices. Two key indicators illustrate this:
- Contribution margin ratio: Calculated as (Sales – Variable Costs) / Sales. Precise variable cost data ensure the ratio reflects true profitability, guiding decisions on product mix and pricing.
- Return on Investment (ROI): Determined by Net Profit ÷ Capital Employed. Accurate allocation of both direct and overhead costs to profit calculations is essential; otherwise ROI may be overstated or understated, leading to flawed investment decisions.
When cost information is reliable, managers can trust these indicators to:
- Identify high‑performing units and allocate resources efficiently.
- Set realistic performance targets and benchmark against industry standards.
- Make strategic decisions such as entering new markets, discontinuing products, or outsourcing activities.
Conversely, inaccurate cost data can distort these metrics, resulting in misguided strategies, wasted capital, and reduced competitive advantage.