Final answer:
The cost system of a product should precisely reflect the comprehensive cost of production, including both direct and indirect costs. Total cost and average cost are measured in different units, and costs should be understood in context and compared on a normalized basis for better decision-making.
Step-by-step explanation:
The accuracy of a cost system in reflecting the cost of a product should be as precise as possible. The notion of calculating the appropriate cost of production can be intricate and is considered both an art and a science. Factors such as sunk costs, market conditions, and government regulations can impact the calculation of production costs. A cost system should reflect not just the direct costs but also indirect and opportunity costs that occur in the production process. This comprehensive approach ensures that pricing strategies are effective and that financial reporting reflects the true cost of production.
When it comes to graphical representation, total cost and average cost are not placed on the same graph because they are measured in different units: total cost is measured in dollars, while average cost is measured in dollars per unit of output. Additionally, behavioral economists suggest that perception of cost is often relative to a reference point, which means that costs should also be understood in the context of gains and losses as percentages, not just absolute values.
In the process of design and decision-making, mathematical models can be used to estimate costs for different approaches, and these costs should then be normalized for comparison purposes. The cost system should therefore provide a clear, comprehensive, and comparative understanding of the costs involved in order to support sound business decisions.