Overview

Learning objectives

After studying this chapter, you should have developed an appreciation of:

1. How the range of decision making and control situations confronted by managers results in many different cost classifications

2. What is meant by an opportunity cost

3. What is meant by direct and indirect costs

4. Methods that can be used to allocate indirect costs to departments

5. What is meant by fixed and variable costs

6. What is meant by incremental and sunk costs.

Introduction

This chapter focuses on the different ways costs are classified in order to support management decision making and organizational control. When referring to costs in everyday hotel affairs, managers use terms suggesting a multitude of cost classification schemes. These classifications include: fixed and variable costs, direct and indirect costs, opportunity costs, incremental costs, sunk costs, non-controllable and controllable costs. It is not surprising that staff without any accounting background become somewhat bewildered by the existence of so many cost classifications.

It is important to recognize that the range of cost classifications used results from the wide diversity of management decision-making and control situations that can arise. Rather than attempting to memorize widely used cost classifications, however, it is recommended that you focus on common control and decision-making issues that can arise and how cost information can be tailored to suit the particular management issue at hand. This chapter provides an overview of several typical decision-making and control scenarios that can arise and the main cost classification schemes that...