Classifying Costs – By Accounting Function

Question: Describe about the Classifying Costs By Accounting Function ? Answer: Introduction Management Accounting refers to the process of identifying, analyzing, measuring as well as communicating information in concerned with organizations goal. The main objective of the management accounting to provide support to competitive decision making for the management by collection of information and processing information that would help in management planning, control and also to evaluate business process. Role of management Accounting in Service Organization As we all are aware that the main objective of the management accounting to provide support to competitive decision making for the management by collection of information and processing information that would help in management planning, control and also to evaluate business process. In the service organization, management accounting is broadly described as tools involving the use of quantitative data in the control of organization. In addition, it is also provided that it has been observed that larger the organization is the greater will be the need for managements/ management accounting for gathering information in order to identify and achieve organizations goal and objective (Accountingtools,2015) Basis of Comparison Financial Accounting Management Accounting Meaning It refers to the accounting system which mainly focuses on the preparation of financial statement. Financial position of the organization with an objective to provide the information regarding the financial position to the interested parties It refers to the accounting system which provides important information to the mangers / top management so as to make plans, strategies, policies for running the organization/ business effectively (Accounting Tools,2015) Mandatory Yes, it is mandatory s per law regulation It is not mandatory yet advisable to be maintained by the organization Purpose/ Objective The main objective is to provide required /true fair information to the outsiders about the financial position of the organization (Accounting Tools,2015) To assist management in planning as well as decision making. Format Specified Format There is no specified format Time Period Financial Statements are prepared at the need of the accounting period which is mainly one year Here, reports are prepared on the basis of requirement and need of the organization. There is no specific time period (Accounting Tools,2015) Main Users Internal as well as External parties Only Internal management since the same is for internal use only. Reporting Financial Accounting summarizes reports regarding the financial position of the company Here, it provides complete and detailed reports regarding various reports There are many classifications of costs the same are not mutually exclusive: Accounting Functions- In the accounting Functions, cost are classified as follows: Financial Accounting Cost - it simply known as accounting cost refers to the measurement of the amount of resources in the monetary terms for a certain purpose (Stede,2016).. If we see technically, cost means a value given to the goods as well as services and when the same expires, this cost becomes/treated as an expense. Example- Historical cost arising from the financial statement is considered as an instant of accounting cost Managerial Accounting Cost- refers to the present as well as future cost which helps management in decision making Example- Cost which derived from budget is managerial cost (Accounting tools, 2015) Management Function- It states that cost can be classified by management Function Operating Cost- it refers to the cost associated with production of goods or services Example- purchase of material cost associated with the production of goods Non Operating Cost- it refers to the cost associated in support to the production of goods or services. Example- Cost incurred for borrowing money for the purchase of material would be considered as operating cost Traceability it is provided that cost can be classified by traceability Direct cost- it refers to the cost which can be directly traced to a department, product, service such as Labor and supplies. Example- during production of concrete, cost of cement, sand wages are direct cost Indirect Cost- it means the cost which cannot be directly traced to a department, product and/or service for example- overhead cost, cost associated directly with heating and cooling or cost of insurance, depreciation, salary of supervisor incurred in a concrete plant Full cost it involves both direct and indirect cost. Behavior - it states that cost could be classified by behavior with regard to the volume of products and/or services. Fixed Cost- it refers to the cost which remain constant in relation to changes in volume for example- rent charges for manufacturing space will be considered as fixed cost or depreciation since this is considered as gradual charging to the expense of a tangible assets for a period of time over the useful life of an asset. For instance Rent, depreciation calculation using straight line method. It has been provided that fixed cost per unit decreases with the increase in production (Accounting Tools, 2015). Variable Cost- it refers to the cost directly proportionate to the change in quantity/volume. For instance cost of supplies is directly proportional to the volume therefore the same is considered as a variable cost. It is provided that variable cost vary with the unit of production. As the number of unit increases, variable cost will also increase vice verca. Semi Variable Cost- this cost varies incrementally to the changes in volume for example- there is no requirement to hire new housekeeper if patient volume increases by 1%. It have properties of both fixed as well as variable cost because of presence of both variable fixed component (Accounting Tools, 2015) In summary Variable cost refers to the cost that vary proportional to the volume, Fixed cost remain constant even though volume changes, semi variable cost refers to the cost that vary incrementally to the change in volume.. Relevant for Decision Making It is provided that cost can be classified by its relevancy True Cost- it refers to the hypothetical cost which is considered as most accurate representation of full cost that are easily determined by the managers/management. Controllable Cost- refers to the cost under the managers influence for example labor Uncontrollable cost- it is not influenced by the management. For example utility cost Differentiate Cost- it refers to the cost arises due to difference in the costs among two or more alternatives. Opportunity Cost- it refers to the potential revenues forgone by rejecting an alternative, for example - amount spent in purchase of fixed cost recovered as an interest income on leasing of machinery. Another example if a gardener decides to grow radish then his or her opportunity cost will be that alternative crop which might have been grown instead (Tomato, pumpkin etc.) as in both cases choice is required to be made. Sunken Cost- it refers to the cost already incurred and is consider that the same will not affect by and would not affect any future decision for instance- A person opens a new manufacturing factory with 1 million it is sunk cost. Another example can be advertisement expenses as expense paid for the same cannot be recovered once made. Variance Analysis refers to the quantitative investigation for the difference arises between the actual and planned figures. This is mainly done so as to maintain required control over a business. For instance- if planned for sale is 8000 and in actual it is 10,000, it means variance analysis yield difference of 2000. Following are most commonly derived Variance analysis Purchase Price Variance- it arises when actual amount paid for purchase is deducted by standard cost then multiplied by the number of units used (Cost Accounting tools, 2015). Variable Overhead Spending Variance- here, the standard variable overhead cost per unit will be deducted from the actual cost incurred the result would be multiplied by the total quantity of output. Labor rate Variance- this variance arises from the difference when actual price paid for the direct labor and standard cost then result would be multiplied by the number of units used. Labor efficiency Variance- it arises, subtract the standard labor quantity consumed during the period from the actual amount then result would be multiplied by standard rate per hour (Cost Accounting tools, 2015). Material Yield Variance- it arises by subtracting the standard quantity of material which is supposed to be used from the actual level of use and then the result arises to be multiplied by standard price per unit. Fixed overhead Spending Variance- it refers to the total amount by which fixed overhead costs exceed their total standard cost for the reporting period (Accounting Tools,2015). Selling Price Variance- Number of unit sold to be multiplied with the difference airing from actual and standard cost (Cost Accounting tools, 2015). It has been observed that there are many problems / limitation associated with variance analysis as follows: Delay in time- At the end of the month, accounting staff is required to compile the variances before issuing the result to the management (Van deer Steed, W. (2016). In the fast paced situation, management requires the result much faster than once a month and consequently relies upon other things that generated on the spot, generally in the production area. Variance Source Information- It is provided as well as observed that most of the reason of variances have not been located in the accounting record and then need arises for the staff to sort out the reason through information like bills of material, labor routing, overtime records etc so as to determine the causes of issue. This extra work may be cost effective only of management able to extract the required information Setting of Standard- as we all are aware that variance analysis is essential a comparison of actual result with a standard set/ derived from political bargaining. Consequently, variance arises as a result would not yield any useful information (Accounting Tools,2015). At the end, it is provided that it not essential to track all the mentioned variances by an organization. In much organization, it is sufficient to review just two or more variances in order to arrive at a desired result. Moreover, it has been seen that most of the companies prefer to use horizontal analysis rather than variance analysis in order to interpret their financial result. Using this approach, one can find multiple periods result to be listed at one side. Operating budget is considered as a forecast and analysis of the projected income as well as expenses of an organization, for a specified period of time. It is also provided that in order to arrive a clear picture, operating budget must account for various factors such as production, sales, labor cost material cost administrative expenses etc. it is usually prepared on weekly, monthly or sometime yearly basis. A review must be given by manager internally in order to check the status of the same. It is provided that maintaining operational budget helps business to track as well as manage their resources efficiently. Also business uses variety of budgets so as to measure their spending and so as to develop effective strategies with a purpose to maximizing their assets as well as revenue (Accounting tools, 2016). Please find below different operation budget: Sales Budget- For the sale budget, sale forecast is important on the basis of which entity can predict the production and also to budgeting variable and costs. It comprises of various item such as no. of units expected to be sell, revenue expected to be generated, impact of credit sales etc (Accounting Tools, 2015). This budget helps the entity to estime the sale to be made during the specified period Production and finished goods inventory Budget- Primary objective of preparing this budget is to provide the clear picture of the amount of inventory assets which is appearing in the budgeted balance sheet on the basis of which decision will taken regarding the cash requirement for the investment in assets. It consists of three main items as direct material, direct labor, and overhead allocation. This budget helps to estimate the inventory level to be maintained so as to protect them the situation of nil inventory at the time of sale. Production Budget- This statement of budget shows the number of units that must be produced. For preparing production budget, three factors must be considered 1. Number of units to be sold 2. Level of inventory at year end 3. Number of units in the beginning inventory (Accounting Tools, 2015). This budget helps to estimate the production volume so as to achieve the turnover and to prevent misuse. Direct Labor Budget- This budget shows the number of direct labor hours and the cost of the labor per hour in order to determine the total cost. For example it takes oneà ¢Ã¢â€š ¬Ã‚ half hour of labor to put together one pickup truck and each labor hour costs 00. The total direct labor budget is for 50,113 (100,225 units .5 hours per unit) hours at a cost of 701,575 (14.00 per hour 50,113 hours) (Accounting Tools, 2015).This budget helps to estime the one of the essential expenses which entity is required to incur while manufacturing the product Direct Material Budget- This budget determines the number of unit to be purchased in order to fulfill the sale expectation during the period. To calculate this budget, it involves the number of units to be produced from the production budget, require level of ending inventory, and also the number of units in beginning inventory (Accounting Tools, 2015). This budget helps to estimate the material to be purchased in order to meet the sales requirement. Manufacturing Overhead Budget- This budget is prepared to include all the cost of manufacturing excluding the direct material labor expenses. This budget includes variable production overhead and, fixed production overhead expenses also. It is also provided that most of the information mentioned in this budget may be estimated from the historical results in case the type of volume as well as product to be manufactures are not varies from the prior period. Through this budget, one can estimate the all expenses to arrive at a decision of sale price etc. References "5 Methods Of Classifying Costs By Accounting Function, By Management Function, By Traceability, By Behavior, By Relevance To Decision Making".Online Success Center. Professional Resources for Online Success. Money Management Success. Self Improvement Books. Training Books. Business Management Books. Cheap Bargain Discount Online Bookstores.. N.p., 2016. Web. 4 Mar. 2016. Albu, N., Albu, C., Bunea, S. and Girbina, M. (2015). Accounting academia in emerging economies: evolutions and challenges.International Journal of Accounting Information Management, 23(2), pp.128-151. Brown, W. and Marques, M. (2016). 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