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Cost is used in different ways in different organization and also the reason for this is that there are many types of cost and these cost are classified in various ways according to the need of the organization. Classification of cost is a process which group the element of cost in order to the nature, attribute or relation. The cost is classified normally in term of the marginal objectives. Cost classification is made for planning, decision making and controlling. When it comes to the types of cost, only some of the classification carries out the cost types in them and as for the types they are: Fixed, Variable, Semi-Variable, Direct, Indirect cost, Department, prime and Overhead. These cost works along with the cost classification's and those are Behavior (In Variability), In relation to the Product.
The cost is break down into elements in order to get the identification, control and accounting. The element is related to the process of manufacturing, and the cost is broken down into three basic elements, "Material Cost, Labour Cost and expense Cost".
Material Cost- this include all the raw material consumed on the process of the manufacturing.
Labour Cost- this includes the payments made to the workmen's and staffs for the service they have done to turn the raw material into finish good.
Expenses- this Consist of the cost of utilities and services used for the conversion process including notional cost for the use of owned assets.
And so far I have explained about the cost and its elements, now let's discuss about the types and the classification cost of the type of cost. As I have previously have mentioned that only some of the classification carries out the types, I would like to start out the classification of cost first and explain the type of cost which contains in it.
Cost can be classified as follows:
According to the Relation to the Cost Center
According to the Behavior
These three are only the basis of cost classification other don't play an important role as these three does and also these three carries out the types of cost as well.
According to the Relation to the Cost Center
The classification should be on the basis method of allocation of cost for the cost unit. This classification is considered to be a sub- division in the classification of cost which is used to identify the way the cost has arisen. And this cost is classified as Direct Cost and Indirect Cost.
Direct Cost Indirect cost
Material Labour Expenses Material Labour Expenses
This cost is directly related in the production process and this can be identified directly on the particular good or services which an organization provided. And this cost has the three element of cost in it, which is the Material, Labour and Expense cost.
Direct Material: the cost of material which can be directly allocated to a cost centre or a cost object in an economically feasible way.
Direct Labour: the cost of wages of those workers who are readily identified or linked with a cost centre or cost object
Direct Expense: the expenses other than direct material or direct labour which can be identified or linked with the cost centre or cost object.
This cost has an indirect effect over the finished products, which is that the Material, Labour and expenses which are incurred in the process of production but this cannot be identified with a good or service. For example maintenance staff in a manufacturing organization.
Indirect Material: Materials which are of small value and cannot be identified in or allocated to a product/service are classified as indirect materials. Example: Consumable spares and part.
Indirect Labour: Payment paid to the workers who have indirectly associated in the production process. Example: Electricians and storekeeper.
Indirect Expenses: expenses other than of the nature of material or labour and cannot be directly allocable to a particular cost center, which mean the cost that has not taken part in the production of a good. Example: Insurance, Lighting and Heating.
According to the Behavior
The cost which is classified in this is the Fixed, Variable, and semi-Variable cost Depending on the Response of the changes in the Activity level.
Fixed Cost Variable Cost Semi-Variable
Fixed Cost: This is the cost which does not vary by the changes of the volume of output. And also they are not affected by temporary fluctuation in any process of an organization. And this cost is known as Prime Cost as well. Examples: Salaries, rent, depreciation etc.
This Graph shows a Company's Annual fixed cost $40. Let's take rent as the fixed cost for this company, as we see the fixed cost (rents) remains same even or not the sales increases or decrease. bec1.gif
Variable cost: this is a cost of element which is directly varied with the Volume of output. And this costs that can be varied flexibly as conditions change. As for an example we can say that the raw material needed and labours used to produce a product unit will vary in depending on the product.
This graph represents the Variable cost Line. The variable cost will vary when there is a change in the process of an organization and as any changes are made it will lead to the cost to change. As for example, cost per unit produce and sold will differ and also the number units sold will also count. And there is probability that there can be an increase or decrease in the units sold. image004.gif
This cost contains the both Fixed and Variable cost components (Elements). The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level of activity achieved by the entity. On the other hand the variable component of the cost is payable proportionate to the level of activity. Example: telephone bill, electricity, commission for selling items
As for an example for this graph: A satellite television, which a price for the box must be paid monthly and to get additional movies, more money has to be given.
The Other Types Of Cost
There are other types as well which is used and important for an organization. And these are the sub-division to the classification system, and this is used to find out the way the cost comes other than checking it through the behavior. And those types of cost are:
As in a large scale Organization, several departments are organized in the responsibilities of a single Manager. And the main purpose for this Cost is that to control rather than predicting that. On the other hand this Cost is divided in to two main categories:
Direct Department: This department is involved in the manufacturing process.
Service Department: Other Than The production Process, which Is the Services or performing function for the organizations purpose.
Total Direct cost is known as the Prime cost:
Direct Material + Direct Labour + Direct Expenses = Prime Cost
Overheads are the indirect Cost but it also contains other overheads such as Administrative Overhead and Selling Overheads. The Total cost of production is calculated by the Prime Cost and the Overheads. And as for the manufacturing cost the Prime cost and the Production Overhead is calculated.
Production O/H cost + Administration O/H Cost + Selling O/H Cost = Total O/H cost
Prime Cost + Production O/H cost = Manufacturing Cost
Prime Cost + Total Overhead Cost = Total cost of production
Explain with examples why different costing methods are used by Organization in the modern context.
Costing plays a significant role in the accounting of the organization through helping the organization to make decisions,
There are various methods of costing which are the needs for the organizations. But the basic principles of these methods are same. And the methods of costing are selected on the dependence on the nature of the business on its concern.
Although the principle in every costing methods are related the allocation and absorption and classification of cost are common to all types of manufacturing and it differs in which the product is manufactured. And this is a reason why the costing method differs from each other to suit the particular production method of an organization.
Even though there a main purpose for the organization to follow the methods of cost and they are:
This is one of the main concerns for an organization, which can be said as the prime function is to make decisions. Even a decision is made it should be the best decision of all, which will be relied on the accuracy and the information gathered for the information. As for the decision making I can simply state throughout making decisions certain cost are affected and some are not and certain changes are made depending on the decision made. Relevant Cost and irrelevant cost can be classified as an example for this:
Relevant Cost: this cost will take effect on the decision made.
Irrelevant Cost: there will be no effect for this cost from the decision made.
In order for the objective of the organization to run smoothly, the operation in the departments or the organization must be controlled. And this task plays an important role for the managers of the organization to reach their ultimate goal. Through the other types of cost, the manager is able to do his/her work smoothly and perfectly. And it is the main role for the manager to find out the main cost which should be controlled and only some of the costs are able to control.
Stock valuationÂ is the method of calculating theoretical values of companies and theirÂ stocks. And an organization must do this in order to find whether their organization running in a profit or in a loss. And as many organizations produce many products it is important for the organization to note out the cost of production for each product.
And also there some other basic reason as well, and these following is a part of the three mentioned above.
Decide whether to improve the company if it on continues loss or decide to shut down.
Make decision to expand the organization to overseas.
Decide whether to produce a new product to the market and to stop the low sale's product in the market.
Target a profit which is needed of thee year or month and measure the profits of the organization.
Make sure the organization is running well on the straight line through wards its goal and run against failures and earn a good income (profit)
Evaluate the products quality and improve it or try to reduce the product of a certain product.
The Costing methods play an important role for the manufacturing organization, the organization is able to calculate or understand the value of the input and the output in the organization's process. By tracking out this information and categorizing them according to their rigorous accounting system, the management will be able to determine the cost the organization production. And it also helps the organization to make decisions as well about the production level, pricing, competitive strategy, the future investments and as well as for other purpose. And each method is adapted by the organization on the nature of the product as well as its output.
And even though there are several methods available, there are two main or basic methods of costing, which is
Specific Order or Job Costing
Continuous operation or Process Costing
All the other methods are either variation of Job Costing or Process Costing and also they can be classified as techniques used for a particular purpose.
The Job costing mainly concerns with tracking down products cost individually. This method plays an important role in the certain manufacturing organization, which product less products, and this is used where each unit of production is customized. And this method is used as well as for the large quantity products, and also this method can be carried out by the customer's request or either and this could be in large quantity or small. This method is carried by the tailors or printing companies for the quantity wise and other example for the less product is Building airplanes and ships. And under this method a JOB COST sheet is prepared it find out the profits or losses for the each job or task done. The most important feature in the job costing is that the job can be identified at the each production level and this makes easier to find out the cost which is charged to the job. And there are two variation in Job costing and they are:
This is a specific order costing, which are orders undertaken from the customers by the organization and also to their requirements as well and this is also a long term duration. Such methods like this are carried out by the construction industries. Example: Ship Building, structure for bridge etc.
This is a specific order costing where small articles are manufactured in batches for sales. Cost is collected according to the batch order and the total cost is divided by the total batch to be arrived in each unit. And the batch costing is applied in many ways; example: a printing industry prints 1000 papers per day. And these 1000 printed papers are tagged as the batch at a certain date or time. And then the cost is calculated for the whole batch (which is taking all production).
This is suitable for a repeat process of production or where goods and services from a sequence continue and the product is identical but cannot be segregated. The cost is charged on the process of unit and average over the units produced during the period. Example: food Process, Chemical, paints etc. the variation of the Process cost is identified through the Operation Costing, Single or Output Costing and Department Costing.
This refers to the method where the cost is separately calculated in the operation of production in each stage, a then later the finish cost is determined. This method is suitable for a organization which deals in mass production of repetitive nature. Example: Motor cycle or car manufacturing organization.
Single Or Output Costing
This is used when the production is identical and uniformed and a single article is produced. The total cost is divided by the number of units produced to get units or output cost. Example: Mining, brink making etc.
Cost of operating a department or cost centre. Total cost of each department is ascertained and divided by total units produced in that department to arrive at unit cost. If one product passes through a number of departments for completion, cost of each department will be picked up and the total unit cost will be the aggregate of unit cost of the departments through which the product passes.
Service operating Cost
This an important cost for a service organization that does not produce or sell goods and render service. As an example we can take Hotels, Hospitals, and Schools etc. Cost of providing and operating a service is ascertained and unit cost is found out by dividing total cost of units of services rendered.
In some of the manufacturing organization, certain product involves many complexities and so the Job and Process Costing cannot be used to calculate the units of the present product cost. In manufacturing organization which produces Cycles, automobile, aero planes etc. use the combination of the various costing methods and the methods used is known as the multiple costing.
As we can see that the organization is able to generate only 2000 as profit without including the Product X, where else with the Product X the organization was able to Gain a Profit of 5500. If so we can understand that without the product X the organization faces a loss of 3500. And as for my suggestion I prefer that the product X must remain. And on the other point, when we see to the contribution of product X, it is in the positive digits so there's no need of terminating the product X, but it would be necessary to terminate product X when it shows negative Digits. As for this case there is no necessary reason to terminate the product X.
Explain the terms Productivity, efficiency and effectiveness and evaluate its impacts on any selected organization
In the modern context it is very important for an organization to be successful and survive from their rivals. The three terms Productivity, efficiency and effectiveness are significant for the organization to endurances in the modern context. As if the organization refuses to follow these terms and matter would lead up with certain problems and it might even cause the organization to go bankrupt (huge Loss).
This is the measurement of the output per unit of input in the production unit. The productivity of an organization is measured in several ways and it is similar to the efficiency and both efficiency and productivity are measured in the same methods. And it is also the output of efficiency and effectiveness (Productivity= efficiency + effectiveness). When there is a change in the efficiency or either in the effectiveness the productivity changes as well.
How the Organization's Productivity is calculated.
Productivity= Value of Output/ Time
The Value of Output is the quality of the product or output of the organization. The time in the equation could be different types of factor, "resources, energy etc".
Example: in a service sector organization the productivity is measured on the revenue collected by the employees (individually) and then the amount is calculated with their salary.
This basically means "making a maximum use of the recourses and trying to minimize the waste wage out of the material. This can be explained as "inputting less resource and making more output". And the efficiency is based on the idea of wastage and as I said before that its main purpose is to input less or produce more products compared on the identical product in order to complete the process.
How the Organization's Efficiency is calculated.
Efficiency = Total Output/ Total Input.
Example: Williams and Bros Ltd and Peters and son's Ltd are manufacturing companies which produces Phones. Williams and Bros Produces 100 Phones per week and Peters and Son's produce 300 in two weeks. Now let's analyze the efficiencies of both companies.
Williams and Bros
Efficiency = 115/07
Efficiency = 16 mobiles per day is Produced
Peters and Son's
Efficiency = 250/14
Efficiency = 18 mobiles produced per day
According to the calculation above we can see that peters and sons is producing more output than Williams and Bros. which is Peters and sons is more efficient than William's, producing 18 mobiles per day where Williams is only able to produce 16 per day.
Effectiveness's main concern is to find out the cheapest concern on the means of finding the objective of achieving the objective smoothly. And this is set to target the organization's goal on the measurement of the output. And effectiveness is also doing the right thing. And so effectiveness is the liability of the company to reach its objective or goal.
How the Organization's Effectiveness is calculated
Effectiveness = Company's objectives/Input
Example: an organization which produces phones has targeted to earn a minimum of $ 100000 profit per month and it has targeted to produce 10000 phones for the month to accomplish their goal. And at the end of the month it was able to produce 12000 phones.