Cost Classification and Material Management

3400 Words Mar 23rd, 2009 14 Pages
Q. Give an Overview of Cost Classification and Material Management:
Ans: Cost Classification:
( Introduction:
In this assignment I will be discussing how costs incurred in any organization may be classified in a number of different ways for a number of different purposes. I will also be looking to find companies that use a variety of different costing techniques and methods. I will also be discussing the comparisons between marginal and absorption costing and how the concept of activity based costing can also be compared with these. To complete the assignment I will be using a combination of lectures notes, text books and the internet to research the various ways of cost classification, and how different companies use these, to enable me
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Fixed costs can be further classified into:
• Committed fixed costs
• Discretionary fixed costs
a) Committed fixed costs consist largely of those fixed costs that arise from the possession of plant, equipment and a basic organization structure. For example, once a building is erected and a plant is installed, nothing much can be done to reduce the costs such as depreciation, property taxes, insurance and salaries of the key personnel etc. without impairing an organization’s competence to meet the long-term goals.
b) Discretionary fixed costs are those which are set at fixed amount for specific time periods by the management in budgeting process. These costs directly reflect the top management policies and have no particular relationship with volume of output. These costs can, therefore, be reduced or entirely eliminated as demanded by the circumstances. Examples of such costs are research and development costs, advertising and sales promotion costs, donations, management consulting fees etc. These costs are also termed as managed or programmed costs. The costs which vary in direct proportion to changes in the level of activity with every increase or decrease in the volume of output or production is known as variable cost. This means that if the activity level doubles, then the variable cost will double.
Examples of variable costs are direct material, direct labour and direct expenses, wages of laborers, cost of direct material, power,