Estimated costs and cost per unit needed

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Reference no: EM1349012

For what other business decisions may it be impossible to calculate the actual cost? What are some of the dangers of basing decisions on estimated rather than actual costs? How might these dangers be minimized?

REALITY BYTES

How does Southwest Airlines know the cost of flying a passenger from Houston, Texas, to Los Angeles, California? The fact is that Southwest does not know the actual cost of flying particular passengers anywhere. There are many indirect costs associated with flying passengers. Some of these include the cost of planes, fuel, pilots, office buildings, and ground personnel. Indeed, besides insignificant food and beverage costs, there are few costs that could be traced directly to customers. Southwest and other airlines must use allocation and averaging to determine the estimated cost of providing transportation services to customers. Estimated rather than actual cost is used for decision-making purposes.

Reference no: EM1349012

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