Abstract

A firm maximizes profits if each decision adds more to the firm’s revenue than to its costs. Although the concept sounds rather simple, it is difficult to do in practice. Economic theory helps the decision-maker to accurately infer changes in revenues that may be associated with a decision. Similarly, economic theory suggests that the costs reported by accountants rarely reflect the true cost associated with the decision. The purpose of this book is to help managers understand how to assess the changes in revenues and costs. Demand and price sensitivity analysis allow managers to infer revenue changes. This book also reconciles the economic theory of cost with common accounting practices so the differences can be reconciled and better decisions can be made.

Keywords

absorption costing, activity-based costing, cost allocation, demand analysis, direct and indirect costs, fixed and variable costs, marginal cost, opportunity cost, unit cost, price elasticity, relevant costs, relevant revenues, variable costing.