Cost classification Cost elements
Direct expenses/ overheads
Indirect expenses/ overheads
Types of cost Fixed cost
A cost is incurred in purchase raw materials to producing finished goods, administrative, marketing and selling activities. These costs are normally classified by manufacturing companies as direct and indirect costs.
Direct costs are all those cost that are directly linked with the production of goods and services. The direct costs can be further divided into 3 main categories.
Direct materials costs
Direct Material is the initial material that goes into the final product and can be traced back to it from the finished product.
E g: – A company that manufactures note books will use papers, ink, stapler pins, machines and labors for producing books. Here the papers, ink and stapler pins are the direct material for this company. So any cost incurred in buying and handling of these raw materials can be taken under the direct raw material costs.
Direct labor costs
Direct labor cost is the cost of employees or workers directly involved in the production of goods or a service.
E g: – Fixed salary of a worker involved in the production line; that is in some part of production like cutting papers, binding papers etc.
Direct expenses / overheads costs
The cost of services which involved producing finished product or expenses included particular production.
E g: – Chargers for electricity usage for the machine used to make the note books in a book manufacturing company.
Indirect costs are those that are not directly involved in the production of the good or services. These costs are essential part of producing the final product. The indirect can be further divided in to 3 main categories.
Indirect material costs
Indirect Material is not the initial material that goes into the final product and can be traced back to it from the finished product. It is the materials or tools that can make the production of goods or a service efficient and easier.
E g: – In a government factory, the sewing machines, printing machines etc. can be the indirect materials as these machines are not a part of the final product (clothes).
Indirect labor cost
Indirect labor cost is the cost of employees or workers not directly involved in the production of goods or a service. In other words it is the work or task done by a worker that does not produce any products but this service is necessary for the success of the finishing point of the production.
E g: – The wages of inspectors, store keeper, watchmen, machine maintenance etc.
Indirect expenses/ overheads costs
Indirect expenses are the expenses are not directly linked with the production of a good. These costs are charged to the final product.
E g: – Selling and administrative expenses, telephone expenses etc.
Types of costs
Cost can also be classified based on how frequent they react to production.
Fixed cost is the cost that never changes over a period of time. And also it does not increase with the output of the firm.
E g: – Rent, wages of permanent workers etc.
Variable cost is the cost which sustain of the input that vary with the production level. These cost change in the short run.
E g: – cost of raw materials, wages paid for the worker of the production line.
Semi variable cost
Semi variable cost is composed of a mixture of fixed and variable elements. Therefore it also named as semi fixed cost. It is also referred to those cost that remain as a fixed cost until a particular level at which it becomes variable.
E g: – monthly rental for a phone may be charged with call charges. Here the rental is fixed as the call charges are variable.
Explain with examples why different costing methods are used by organizations in the modern context.
Costing methods are used by companies as means for pricing or stock valuation and to control business or to assist in managerial decision making. Costing methods are very important in accounting in order to make the right decision for the success of the organization. If the company failed to make the right decision at the right moment, it will be a reason for the drawback of the organization. Now let me show you some reasons why these methods are Applying in a business.
To decide buying or making a product more profitable for the organization.
To decide whether to accept or reject an order placed by a consumer.
Make decisions of extending business to international level by doing business with foreign countries.
To decide extra shifts or extra efforts in a production of a product or reducing production.
To plan how much profit is needed or measure the capacity of the profit of the business.
To decide whether to shut down the company if it is making continues loss or to try to improve the business if there any chance.
A company starting out might use the break even concept to calculate and see at what level the company can start earning profits and at which level the company will be suffering a loss.
To decide whether the current plant is working out or not and to decide if replacing the existing plant is going to be profitable for the company or not.
To decide to star production of a new product or to stop the production of an existing product.
Costing for pricing and stock valuation
This method for costing is followed where the costing is done separately for each product. Therefore job costing is mostly used in a situation where the products manufactured or service provided are based on a particular specification of the customer or many goods are made for costing done separately. The productions of these goods are higher due to the fact that they are orders placed by customers.
E g: – Job costing used in construction industry because the constructions based on the orders placed by the customers. Here the costs are calculated separately for each building.
Batch costing means all the fixed and variable cost which is incurred when producing a batch or a set of products. Here a number of products are taken as a single job in total. The unit cost of a batch of products can be calculated by dividing the batch cost by the number of units produced.
E g: – A shoe manufacturing company may produce 100000 products per month. These 100000 products may be labeled as a batch at that particular date and cost is calculated for the entire batch taking all products as a single job.
Contract or terminal costing
Contract costing is also similar to job costing. It is usually connect with site based work, by the requirement s of the customers’ undertaken and relatively long duration.
E g: – Company involved in the construction industry may use this method as individual customers place different contracts which last for several years or accounting periods.
Process costing is found where the product go through various stages as it goes to the finished product. Products which are made by combining different parts of the final product are also including the process costing method. The following is terms are also used under process costing.
Single or output costing
E g: – A finished computer passes through various processes. First of all are made separately and they are fixed together in the final progress. For this product the costing is calculated based on the process.
Operation costing or service costing
Operation costing method is used by companies which does not have a specified finish product as the output like the service industry.
E g: – Service of a lecture
Here the costing of the products is based on the departments at which they are produced. Costs of products are calculated as how cost and at which department.
E g: – News papers are made at different departments.
Multiple costing or composite costing
Multiple costing applied to calculate the cost for the products which have a very complex production. For these kinds of products one costing method may not be enough. Therefore they use several costing methods in calculating.
E g:- Products like vehicles, airplanes etc. the total cost is based upon a mixture of sub prices calculated in the job costing and service costing etc.
Control and managerial decision making
Activity based costing
It is the attribution of costs to cost units based on the benefits received from indirect activities.
E g: – Cost of quality controls is spread among the units produced and each contains a part of this expense.
Historical costing is ascertaining costs after it have been incurred so that costs can be compared over different period.
All direct costs are charged to the finish product and all indirect products are charged to profit and loss.
Here both variable and fixed costs are taken as a total cost and charged on the product.
In this costing method the variable costs are taken rather than the full cost of production and total fixed costs are deducted to get the profit or loss.
Collect production details from any organization that produced three products, analyze and present these data.
Propose the terms productivity, efficiency and effectiveness and evaluate its impact on any selected organization. Explain the terms productivity, efficiency and effectiveness and evaluate its impact on any selected organization.
The modern environment to managing a company specifies that productivity, efficiency and effectiveness are important for the success of the organization and also for the survival among the competitors in the business field. This is based on the fact that one company which is not concerned with these matters is actually on a worthless path and may easily lead the company to come to an end of business.
Productivity is a measure of output from a production process, per unit of input. It is fairly similar to efficiency as productivity also measures the same as efficiency. However productivity is an outcome from the sum of effectiveness and efficiency or by the way of increasing the effectiveness and efficiency productivity also increase. There are two way to measure the productivity of a company as I shown below.
Productivity = Output
Productivity = Value of output / time
In the above formulae the time can be many different factors such as energy, resources etc. And the value of output is the defined quality of output by the organization.
Productivity = Output > Amount of achieved goals > Effectiveness. Inputs > Amount utilized resources > Efficiency. However enhanced productivity always defines rather value of an organization as follows:
Can restrict the waste of resources.
Company always can sustain the increasing demand.
Company easily can faces to the competition of the market.
Employee development also increases.
Manufacturing quality increases.
Production cost can get low and purchase prizes can restricted.
Net profit increases.
There are five ways that can helps to enhance the productivity as I have shown below.
Enhancing the output, when the inputs keeping as stet.
Output keeping as stet, when as the input decreasing.
Enhancing the output, when as the input decreasing.
Enhancing output rather than enhancing inputs.
Decreasing inputs rather than decreasing inputs.
Efficiency is dong the thing right. In other words contribute the resources by minimum wasting to achieve the organizational goals and objectives or the way to utilize the resources to achieve the organizational goals and objectives. Efficiency is closely related to the productivity.
E g: – A company that produces shoes could be said efficient if it uses up all the resources in order to output as much products or services. It company reaches criteria it could be labeled as an efficient company.
Efficiency = total output/ total input.
Now let me evaluate its impact on ABC Company and XYZ Company
E g: – Company ABC produce 50 tables in 10 days and company XYZ produce tables in 120 tables in 20 days.
Based on the above calculations we can identify that the company XYZ is more efficient as it is able to produce 6 tables per day compared to company ABC which can only produce 5 products per day.
Effectiveness is doing the things right. In other words achieving the appropriate objectives in the given period or deciding the right things. Therefore effectiveness is the liability of the company to achieve the set targets and objectives. Effectiveness is measured by output in terms of the set target by the company.
E g: – A company is producing mobile phones. The company wants to earn a minimum of $100000 profits in one month and has set a target of producing 5000 mobile phones in order to achieve the profit. And after a month the company is able to make 6000 mobile phones.
Effectiveness = 6000/5000
Effectiveness = 1.2
However Effectiveness and Efficiency always expresses the relativity between each other’s to the Management as follows:
How it is done? In the wrong way, in the right way, Ineffectiveness
A Critical Literature Review Of Balanced Scorecards Accounting Essay
This review discusses the “Balance Scorecard”, an integrated strategic performance management tool (see Figure 1), which was developed by Robert Kaplan and David Norton in 1990. Recently, the Harvard Business Review hailed the Balanced Scorecard as one of the 75 most influential and prolific ideas of the twentieth century (1).
Nowadays, in an era of globalization, customer power, and rapid change, it is imperative for organizations to be flexible to respond rapidly to competition and market changes, and to execute their long-term strategy effectively. The existing antagonistic environment connotes that companies have to devote significant time, energy, human and financial resources to measure their performance in order to achieve their strategic goals. Although it is a common sense that measurement is more crucial than ever, most companies have developed systems for capturing, monitoring, and sharing performance information that prove to be critically flawed. These systems may have been perfectly suited to the nature of any physical assets, but they are incapable of capturing the value that is being created from the mechanisms of today’s modern business organizations. Those mechanisms refer to the intangible assets, such as employee knowledge, customer