Unit 372

Hi Conster, cost behaviors impact businesses in the way that if the raw material increases, the finished goods will also increase. For instance, every year the price of the steel goes up; therefore, any product build with steel will have an impact on their prices to cover up the increase in paid for the raw material (Edmonds,

Cost drivers are factors that if changed, can cause change in the total amount of a given cost.

A common misconception made by management of a company is that a single definition of cost is ideally suited to all types of manufacturing decision. What a manager’s plan to produce must be well known to him and always taken into account where he fails to realize this, difficulty arises in determining the cost of production. This gives rise to two reasons for the difficulty in determining the cost of products produced. First, the relationship between the cost incurred and output produced is often difficult establish. Secondly, cost may be assembled, combined and reported in different ways.

Direct labor cost is the cost of the labor force directly engaged in the manufacturing of the product or rendering of service. Direct labor cost can be determined by measuring the time consumed in the manufacturing of the product. Direct labor cost consists of basic pay and overtime worked in the manufacturing of the product.

The new costing method (Louise’s suggestions) calculates the cost driver rates which are derived from dividing activity expenses by budgeted activity level for the cost driver. For example, to calculate the purchasing cost driver rate simply divide $80,000 by 909 to get an outcome of $88.01. Similarly, to calculate the material handling cost driver rate divide $95,000 by 1,846 to get a result of $51.46. Continuing the same method of calculation for the rest of the activities will determine the rest of the cost driver rates. Adding all of the budgeting costs together results in the total manufacturing overhead costs which is, in this particular instance, is $600,000.

The costing systems aid companies in determining the cost of a product in relation to the revenue the product generates. The costing systems commonly used in businesses include activity-based costing and traditional costing. Traditional costing system assigns the manufacturing overhead based on the capacity of a cost driver. For example, the amount of direct working hours required to produce a particular item. Cost drivers are factors that cause cost to incur, like machine hours, direct material hours, and direct labor hours. Activity-based costing system allocates cost of manufacturing a product in accordance to the activities required to produce the particular item. It’s therefore essential for managers to understand the merits

First, the resource costs are allocated to the different activities based on the resource drivers identified. Thereafter, the activity costs are distributed to the cost objects based on the activity drivers identified, based in the consumption of the activities by the products and services. The cost per unit can then be easily identified by dividing the total cost of the product or service by the number units produced or the number of hours of service made

The second type of classification is direct costs and indirect costs and it depends on costs traceable. Direct costs or manufacturing costs are these which are associated with the manufacture of a good. They are divided in direct materials, direct

Direct cost can conveniently and easily be linked to a stipulated cost item. The conception of direct cost spreads past direct labor and direct materials. For instance, if Nike is allocating costs to its many national and regional sales divisions, then the pay of the manager in the Abu Dhabi office will be a direct cost of that office.

1. Direct costs: - Direct costs which can be defined as the ability to accurately track the cost of a few efforts to cost objects. Cost object may be a product, classification of any fee, a division of the direct costs of a project, such as usual benefit of a single cost object either directly or indirectly as a cost object by Perspective. A specific cost may be direct costs of a cost object, but the indirect costs of other cost objects.

i. Direct – costs that can be traced directly to one output. For example, the wood and paint that it takes to make a chair.

Setup (or production change) costs: To make each different product involves obtaining necessary materials, arranging specific

Examples of variable costs are direct material, direct labour and direct expenses, wages of laborers, cost of direct material, power,

The exertion that can be followed straight forwardly to (or in) a particular expense focus or expense question, for example, a division, procedure or item are referred to as Direct cost, (for example, work, material, fuel or vitality) differ with the rate of the yield however consistently for every unit of generation, and are for the most part under the control and obligation of the office head.

Costing systems are the programs that supply information about the value of direct labor hours and numbers of units produced. With the help of data such as product cost, the managers can generate estimation of cost associated with different activity carried in the organization. The costs systems operate by taking total cost as basic for calculation. Costing is essential for every organization, as every manufacturing and other department has to be assigned accurate budget for proper operation (Hansen, Mowen and Guan, 2006).