Designing A Cost Classification Approach

1087 Words Oct 6th, 2016 5 Pages
In order to efficiently calculate cost or expenses, Mal Ltd should adopt a cost classification approach. Cost classification is the separation of costs or expenses into different categories. The main categories that is largely used in cost classification are direct and indirect costs which can be broken down into many different costs that are expensed in the business. Cost classification can improve a business in many ways. One of the main benefits is through cost classification, profits can be increased. This is done by having an effective cost control and cost reduction (Kaplan & Cooper, 1998. By breaking down costs into fixed and variable costs, it will be easier to control and reduce costs. Cost classification can also help in the fixation of selling price. As the cost of a product can be broken down into more specific costs, it enables the management of Mal Ltd to adopt the most suitable selling price. Classifying costs can help Mal Ltd disclose which activities are profitable and non-profitable. This enables management to decide whether they want to continue carrying out and expanding profitable activities or eliminating unprofitable activities. It also allows management to improve budgeting (Kaplan & Cooper, 1998). With cost classification, management of Mal Ltd can ascertain which costs belong to which department and this allows them to efficiently set budgets for different departments in accordance with the level of activity within the department.

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