Fixed Cost And Period Cost Accounting Essay

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Cost is an amount has to pay for produce the product. Cost is defined as the value of the forgo made to get goods or services, calculated in dollars by the reduction of assets or incurrence of liabilities at the time the benefits are acquire. At the time of achievement, the cost incurred is for present or future benefits. When these benefits are utilized, the costs become expenses. Management is constantly faced with making choices among alternative courses of action. Information about various types of costs and their behavioral patterns is vital to effective decision making. Data can be visualized as being in one large cost accounting information pool that is routinely accessed for purposes of product costing and performance evaluation and managerial decision making.

Cost classification is group cost of the process, according to their common characteristics. An appropriate cost category to determine the cost center or cost unit cost is essential. The cost can be divided into the characteristics of the nature of the accounting, materials, labor and costs. The same cost figures are based on different costing methods, depending on the purpose and demands particular attention. Important ways of classification are:

First classification is categories, according to elements of product. The cost divided three type is materials, labor and expenses. Material cost is product a particular work order or provision of a service. Labour cost is defined as the total expenses bear by employer when need employ workers. Expenses are defined as money expended or cost incurred use for buy raw material and other cost of doing business.

Second classification is cost relationship to production. This classification is directly related to the cost elements of a product for example materials cost and labor cost .The two type on the basis of their relationship to production, are prime costs and conversion costs. Prime costs is expenses for the material and labor uses in production and measuring the total cost. Conversion cost is direct and indirect expenditure incurred in converting.

Third is costs relationship to volume. Costs will changes with product volume difference volume difference cost. For example 750ml shampoo RM7 and 1500ml shampooRM13. Perceptive their behavior is very important in almost all aspects of product costing, performance evaluation, and management decision making. Costs in relationship to volume are classified as variable, semi-variable, and fixed.

Fixed Cost / Period Cost: Fixed costs are a costs does not changes with decrease or increase in the amount of goods and service produced. For example rent of factory.

Variable Cost / Product Cost: Variable costs are the total cost over a period of time for the variable inputs. Any increase in the volume of production results in an increase in the variable cost and vice versa. For example of variable costs is cost of raw material.

Semi-Variable Cost / Semi-Fixed cost: These costs are in part fixed and in part variable. For example: repair machine fees.

Fourth classification is management's ability to trace a cost may be considered direct or indirect depend on the ability to manage traced it to specific jobs, departments, sales regions, and so on. Direct costs are costs that management is capable of tracing to specific things or area. Examples of direct costs are direct materials and direct labor costs for a specific product. Indirect costs are costs that are common to many things and are thus not directly traceable to any one thing or area. Indirect costs are usually charged to items or areas on the basis of distribution techniques.

Fifth classification is department where incurred a department is a major functional division of a business. Costing by department helps management to control the costs and to calculated income. The next types of departments are found in developed companies: Production departments. These supply directly to the production of the thing and include departments in which production processes take place. They include manual and machine operations directly performed on the product factory. Service departments that are not directly related to the production of an item. Their function is to provide services for other departments. Examples of service departments are payroll, factory office personnel, cafeteria, and plant security. The cost of the service sector is usually assigned to the production sector, because they provide services to benefit.

Sixth classification is functional area on the basis of Function: Production, administration, selling & distribution are three important functions of a company concern. Taking these functions into consideration, costs have been classified by:

Production or Manufacturing Cost: Manufacturing costs are those costs which are incurred in the course of manufacture. It includes cost of raw material, cost of labour, other direct cost and factory indirect cost. Example of production or manufacturing costs for example is rent and electrify fee.

Office and Administration Cost: These costs are incurred for the general administration of the enterprise. It includes office costs as well as administration cost. For example, salary of office staff, rent of office building, electricity charges, audit fee, printing and stationeries etc.

Selling and Distribution Cost: It includes both selling cost as well as distribution cost. Selling costs are those costs which are incurred in connection with the selling of goods and services Distribution costs are those costs which are incurred on dispatch of finished goods to the consumers. Example of selling and distribution costs are: sales men salary, packing charges, carriage, out ward, advertisement, ware house charges etc.

Seventh classification is period charge in income. Costs may also be classified on the basis of when they are to be charged against revenue: Some costs are first recorded as assets (for example, capital expenditures) and then expensed (that is, charged as an expense) as they are used or expire. Other costs are initially recorded as expenses. The classification of costs into categories relating to the periods they benefit aids in measuring income, in preparing financial statements, and in matching expenses to revenue in the proper period. Two categories used are product costs and period costs: Product costs are costs directly and indirectly identifiable with the product. They are direct materials, direct labor, and factory overhead. These costs provide no benefit until the product is sold and are, therefore, inventoried upon completion of the product. When the products are sold, the total product costs are recorded as an expense, called the cost of goods sold. Cost of goods sold is matched against revenue for the period in which the products are sold.

Eighth Classification is cost Relationship to Planning, Controlling, and decision making. Costs that support management in its planning, controlling, and decision-making functions are briefly defined as follows.

Decision making costs these are special purpose costs that are applicable only in the situation in which they are complied. They have no universal application. They need not tie into routine financial accounts. They do not and should not conform to the accounting rules.

Controllable costs these are the cost which can be influenced by the action of a specified member of an undertaking. A business group is usually divided into a number of responsibility centres and each centre is headed by an executive. The executive can thus control the costs incurred in that particular responsibility centre.

Uncontrollable costs are costs which cannot be influenced by the action of a specified member of an undertaking.

Committed fixed costs are unavoidable in the short term if the organization has to function .example are depreciation and rent.

Discretionary fixed costs are those which are set at a fixed amount for specific time period by management .for example are research and development costs, advertisement and market research expenses.

Relevant costs are those costs which would be changed by the managerial decision, while irrelevant costs are those which would not be affected by the decision.

Opportunity Costs refers to the advantage, in measurable terms, which has been foregone on account of not using the facilities in the manner originally planned.

Shutdown Costs as a company rendering service may have to suspend its operations for a period on account of some temporary difficulties such as shortage of raw materials, non availability of labour.


The private sector consists of privately owned and operated by certain identified people. These people are working for and rely on the firm, for their living. The most fundamental objectives of the firms in private sector .Sole trader or sole proprietorship and partnerships are private sector.

A sole trading or sole proprietorship is business which a single individual uses his or her own fund to start and operate business. As such, he or she owns all profits generated by the business. However, the owner has to shoulder all losses personally. Besides, the owner is always responsible for the daily management of his or her company. For example, the income from the business is included as income on the owner's individual income tax return. The business does not have its own tax return.

Additionally, legal obligation is not available to the public financial accounts of a sole trading business. Unlike incorporated business, owners of sole trading business have to carry the debts themselves. Examples of sole proprietorship business are: hairdressers, storekeepers and plumbers. In the course of running business, a sole proprietorship accumulates financial information such as the cost of materials, equipment, rent, electricity and income from sales-but is not required by law to make any of that financial information available to the public.

On the other hand, partnership is a corporate association that its membership is in between two and twenty members. Partnerships do not have a separate legal entity. All partners provide necessary finance to business. They would share profits and shoulder losses according to different percentages, and the percentages will be depending on their contribution to the company. Partnerships have unlimited liability and each partner is jointly liable with the other members for any debt incurred by the business.

A partnership agreement is usually drawn up by the a lawyer (or legal counsel),which details the contribution (in cash or in kind ), role and responsibility of each partner, conditions under which the partnership may be terminated , distribution or compensation in the event of withdrawal of one partner (termination of partnership) and options handing intra-partner disputes. Personal names or trade names can be used as business names, and the application of business name form must be filled in before a business can be registered. For example if the company is sued for violating an employee's civil rights, then the partners are legally liable.

Two types of partnership:

Ordinary partnership

All partnership are ordinary who have unlimited liabilities.

The entrance of new partner must be permitted by all existing partners.

Equal rights enjoyed.

Limited partnership

All partners have limited liabilities but at least one ordinary partner.

Only ordinary partner can take part in the management of the business.

Limited partner can inspect the partnership's financial records and give advice .

Reasons for dissolution of partnership:

If the partner dies

Company bankrupt

Unsound mind

Aim achieved

Duration end

New laws

Sole Proprietorship


A person who enters business on his own account (using his /her own money as the capital, capital is very low).

Oldest, simple and most common type of business.

Decision made by the own alone.

2 to 20 people carry on a business with a common aim.

Business aim: seeking to achieve larger scale through increased capital, shared responsibility ,reduce competition, and shared experience /skill/expertise /ideas

Partners are people who contributed capital within this business.


Sole traders


Personal exposure

A sole trader's needs personal bears the risk exposure to the business debts. So sole traders needs use own funds settle the shortfall.

Partners share the debts of the business.


A sole trader generally is lowest stature but it is easily set-up and usually involves just a single manager.

Partnership often greater stature than a sole trader because more person involved in the business.

Cost of setting -up

Sole trader no need bears official expenses and no needs any agreements between the owners.

Partnership no official costs involved in starting a partnership business, but there are agreements between the partners.