Managerial Economics and Strategy, 2/e

6.1 The Nature of Costs

Too caustic? To hell with the costs, we’ll make the picture anyway.

—Samuel Goldwyn

Making sound managerial decisions about investment and production requires information about the associated costs. Some cost information is provided in legally required financial accounting statements. However, such statements do not provide sufficient cost information for good decision making. Financial accounting statements correctly measure costs for tax purposes and to meet other legal requirements, but good managerial decisions require a different perspective on costs.

To produce a particular amount of output, a firm incurs costs for the required inputs such as labor, capital, energy, and materials. A firm’s manager (or accountant) ...