Is Postgres ignoring my function cost annotation?
I believe the costs refer to different units of measurement. The cost when used in functions is the estimated execution cost in units of cpu_operator_cost, whereas the EXPLAIN plan costs are units of disk page fetches (seq_page_cost).

For function cost details, see http://www.postgresql.org/docs/current/static/sql-createfunction.html

For EXPLAIN plan costs, see http://www.postgresql.org/docs/current/static/using-explain.html