Management Accounting - Cost Classification

2266 Words Mar 15th, 2008 10 Pages
COST CLASSIFICATION ASSIGNMENT

To classify the various costs would first of all require a definition between the two types of accounting that practically all businesses have to face and a number of key terms which are equally important. These are management accounting and financial accounting.

1. THE DIFFERENCE BETWEEN MANAGEMENT & FINANCIAL ACCOUNTING:

Management accounting is concerned with decision making, cost apportionment, planning and control. It is based within the organisation and is solely for the use of the managers to conduct their business dealings. The process of management accounting is proactive meaning the company is looking ahead, not backwards.

Financial accounting on the other hand is externally based and is
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This means that it is up to them on how many employees they would like to work on a certain process. This is also the case with direct materials and variable overheads. However, there are also costs which can be controlled up to a certain extent, such as advertising costs. In this case, a department manager would be able to control how much of the allocated advertising budget is spent in their department. However, once this budget is spread throughout the whole company, it will be difficult for that particular manager to oversee budgets in the other departments.

Incremental costs are those cost which increase or decrease because of an increase or decrease in one whole unit of output. As an example, the incremental cost of increasing the level of software packages from 10 units to 15 units is the additional cost for Microsoft of producing five extra units of software packages

Many costs within the manufacturing industry can be easily separated from fixed and variable costs. The method used to achieve this is known as Cost Separation. The calculation for this is very simple and it enables the management to work out how much an individual unit will cost so that pricing and other useful decisions such as planning and control. The following example utilizes the Hi/Low method to explain how costs can be separated:

(Hi Low Method): Units of chocolate bar: Total Cost: Total variable cost: Total
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