Cost classification and their importance in pricing Strategy


P2. An appropriate Costing System for Royal engineering

The difference between the actual and standards are represented by means of variance. There is sign of efficiency if actual cost is less than standard costs and the difference here is termed as favorable variance but if the actual costs are more than the standard costs there is a sign of inefficiency and the variance is unfavorable for royal engineering.

Some deviations are observed when the actual performance are recorded and benchmarked with the standard set. The deviations occurred is the variance. Hence in royal engineering variance is the difference between the standard amount and the actual amount during a set period of time.

Hence in Royal engineering the variance can be done in a complete financial year for managerial decision making taking the technology changes that has occurred. The difference variance of royal engineering's Standard costing systems at a glance -

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Cost Variance

2. Price variance

Direct material price variance

Direct wages rate variance

Variable overhead price variance

Usage variance

Direct labor efficiency variance

Direct Material usage variance

According to the given data and calculations:

a. Material Price variance = 4800(A)

b. Material Usage Variance = 2800(F)

c. Total material Cost variance = 1000(F)

By if the material is purchased at GBP 14.80/Kg

d. labor rate variance = 3060(F)

e. Total direct labor variance = 74600(F)

For 2000 units labor hr required = 17000 Hr

So labor rate variance = (17-17.5)*17000= 8500(A)

f. Total direct labor variance = 52500(5)

Hence taken in to consideration the technical changes and the managerial decisions variance analysis can be the companies' standard costing system.

P3. Use and suitability of different costing system in an organization

Recommendations in costing Technique:

For a proper costing system the following recommendation can be done

--A sounded planning is crucial

---The technique must be appropriate to the organizations

---Recognition and dealing with reluctance

---These should be no barrier in the progress communication

---Redundant can be reduced but it should not eliminated

---Technique implementation is expensive and complicated

Use of Costing Technique in Royal engineering:

Basically the benefits of using a proper costing system have impact in the three dimensions:

Particular concern:-

---Increment in profitability

---Improvement in financial position

---Competitive capabilities improvement

---It can such as an ender of efficiency

(B) Industry concern:-

---A company can act as a server of a trend setter for another company

Concern of the Nation:-

---Scarce resources can be efficiently utilized

---The Government can be levies high taxes

---Sustainability in the market with new customer acquisition

---Combating Inflation

P6. The Need For corrective actions:

(1)Consolidation of vender: Proper monitoring in the changes of the price of raw material must me taken into consideration properly and purchase must be done with in the standard rate of raw material.

(2)Value Analysis: A systematic new product/process development for customer satisfaction.

(3)Out sourcing of congregation: If the internal decision making system is not working properly solution should be taken from external experts for better solution.

(4)Consistency: The costing system must be reviewed, planned, implemented on a regular basis for maintaining consistency.


The following steps should be taken:

A clear accountability and sound reporting is required to trim cost.

Specific cost target must be given to the individuals in a suitable way that the follower can control the output.

Ttracing the result on a regular basis

Single accountability system must be there for tough management. Targets and outcomes are controlled by a single person

Breaking up of the old management system when desired and update accordingly.

Finance experts must train/coach the managers whose core competence is not up to the point.

Finance professional should be the leader and proper time management to train and develop follower manager.

P8.Value Analysis:

This is the method of improving the value of a product/process by examining its components attributes and their respective costs. Resolution is done by either training their respective costs or by increasing the value of the functions of the associate components.

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Value= function of customer satisfactions

Costs of the functions

Function= for satisfying customers the effect produced by a Products or by any of its attributes.

Value analysis = The method to increase the value of an attribute based on the work plan and the attributes based on the work plan and the attributes may be an existing or a new product/process.

Need = Desire of the customers.

Benefits of using value analysis:

Customer orientation is high: basically focus on the aspects that can delight the customers.

Reducing the costs by eliminating the functions that is irreverent to customer satisfactions.

The new ideas may add radical changes that are arising from creativity & innovation phase. Hence the company may take the competitive advantage in the market compared to its rivals.

A systematic new product/process development.

Barrier to systematic value analysis:

Its better not to make use of generalization and phony statement.

The information that is used should be from the best source.

For better result its better to collect, conclude and analyze all the costs that are involved in the costing system rather than only focusing on the functional entity.

P9. Activity-Based Costing System:

In this system data are gathered about the operating costs of a business for the specific activities the costs are assigned such as planning, engineering or Manufacturing and after that the activities are projected several products/services. This method is fruitful for analyzing which product, service, or resources are increasing the profitability or loss of the orgasms action. And hence the manager can take Betty decisions for costing. Activity based costing systems is effective in long terms rather than short term.

A proper planning and commitment from senior level management is required for the ABC analysis. It is best effective if a trial study could be done on a development whose expected profitability is not achieving. It this can be done these is a minimums chance of success in sawing money. But if cost sawing measures are not determined properly or the ABC system is not implemented properly, this system is not suitable for the company.

ABC Analysis:

In this technique goods are classified in three categories:

A=Very costing goods

B=Low to moderate cost

C=Bulky goods-which consists of lower value

A complete attention must be these in A good and

Goods are these, which have 80% of our investment (of inventory) have 20% of space only.