Costs may be allocated by the contribution approach, by activities, by standard allocation formulas, or by a number of other approaches. Cost allocation is a part of the cost accounting process. One of the critical factors involved in cost accounting is the differentiation of costs into fixed and variable classifications. Fixed costs are those which must be borne by an organization, regardless of activity levels, while variable costs are those which fluctuate according to activity levels. Through the differentiation of costs into fixed and variable classifications, managers are able to construct breakeven charts and other decision making and control tools. Thus, cost accounting plays a major role in an organization's decision making processes.
In addition to fixed/variable distinctions, production costs are also considered in the contexts of full costs, direct costs, indirect costs, job costs, process costs, and so forth. Each of these concepts provides the manager with a different perspective of costs. These different perspectives may provide a means of enhancing the efficiency of an operation, without damaging the integrity of the organization, even though most of the costs derived through the application of these concepts of costs will differ from the costs derived through the applica tion of financial accounting concepts. The use of costs derived through the application of these managerial accounting
1 2concepts permits managers to make valid and rapid decisions on the basis of performance variances from managerial accounting cost factors or ratios.
Internal cost controls within organizations cover a multi tude of factors and considerations, depending on the activity being controlled. Within production organizations, one of the most important forms of internal cost control involves the use of standard costs. For a corporate aviation department, the costs of operating the department may be charged to spe...