Question

Pricing in cost accounting and managerial decision

Answer 1

Direct and indirect costs do not necessarily co­incide with the economist’s concepts of fixed and variable costs. The criterion used by the economist to draw a distinction between fixed and variable cost is whether or not the cost varies with the level of output. But the criterion used by the accountant is whether or not the cost is separable with respect to the production of individual units of output.

To establish the equivalence between economist’s cost concepts and accountant’s cost concept we must search out or identify that part of the indirect or overhead cost which varies with the level of output.