Final answer:
Cost management involves using activity-based costing (ABC) to manage costs effectively by allocating overhead more accurately. Mathematical models help in estimating these costs which get normalized for comparison. Breaking total costs into fixed, variable, average, and marginal costs helps businesses in decision-making processes.
Step-by-step explanation:
When information from activity-based costing (ABC) is used to manage costs, this process is known as cost management. ABC is a method that assigns overhead and indirect costs to related products and services, which can provide a more accurate picture of the true costs associated with producing a specific product. By using ABC, businesses can better understand how to allocate resources and which products are actually profitable.
Mathematical models play a crucial role in activity-based costing by estimating costs for various approaches and predicting cost for alternative solutions, which is essential during the idea generation phase. These costs, which include materials, fabrication or manufacturing, operation, and maintenance, must then be normalized to compare them effectively, often resulting in a cost per thousand gallons of water in manufacturing processes.
Breaking down total costs into fixed costs, marginal cost, average total cost, and average variable cost provides valuable insights for a firm. This detailed categorization assists firms in decision-making about the profit-maximizing quantity to produce and the right pricing strategy. However, to make these final decisions, a firm must combine cost perspectives with sales and revenue analysis and consider the market structure the firm operates in, especially from a long-run perspective.