COST MANAGEMENT

Cost Management

Abstract

Cost accounting system helps out the top level of managers regarding the decision making. Despite the cost accounting techniques are more useful in the decision making but there are some issues related to the cost accounting. There should further improvement in the cost management system for providing the better results.

Abstractii

Nature and Purpose of Cost and Management Accounting1

Costs Classification2

Direct Cost2

Indirect Cost2

Cost Behaviour3

Level of Activity3

Basic Principle3

Cost Division by its Behaviour3

1.Fixed Cost4

2.Variable Cost4

Further Cost Division by its Behaviour4

1.Step-fixed cost4

2.Semi-variable cost4

Holiday Resort5

a)Break-even Point5

b)Break-even Graph7

c)Basics of Cost-Volume-Profit Analysis7

d)Absorption Costing and Marginal Costing8

Advantages of absorption costing8

Advantages of marginal costing9

JK Limited9

a)Contribution Margin9

b)Comments on Results9

c)Limitations of the Break Even Analysis10

Conclusion and Recommendations10

References11

Appendices13

Nature and Purpose of Cost and Management Accounting

Cost accounting system is used to make the budget, analysis of profitability and variance of the usage of funds and operational actual cost. It is part of the management of accounting. Cost accounting system helps out the top level of managers regarding the decision making and the cost reduction as well the improving the level of profitability for the organization. It is not essential to approach the Generally Accepted Accounting Principles (GAAP) because the primary purpose of the cost accounting system is used for the internal managers (Drury 2001, pp.20-24). The system of the cost accounting is valuable regarding the transformation (i.e. supply chain operations into the financial values of an organization).

The purpose of the cost accounting system is to make the management efficient by determining the exact cost of the goods that are to be manufactured and rendered services (Ghose 2007, pp.35-45). Due to which it supports to furnish the data, facts and figures for the effective and efficient control of the management in order to provide the essential results regarding the products in terms of the profitability operations of the business. The objective of the cost accounting system is also to identify the profit of the specified products or services for any company. It is crucial to be familiar with the problems of management for the cost accountant in order to perform certain functions appropriately. A cost accountant must understand the facts and figures that will be obtained and presented for the purpose of profitable solutions of the issues and problem to the management (Drury 2001, pp.20-24).

There are a number of variable factors on which the nature of the cost accounting is dependent such as size of an organization (i.e. small, medium or large), number of units or products that have to be produced or services as well, the operational expenditures of a firm (i.e. implementing the cost accounting system), the nature of the marketing operations, manufacturing operations and the processes regarding the administration and the last factor indicate the management's requirements and the business's nature either it merchandising or manufacturing (Palmer et al. 2010, pp.148-149).

Costs Classification and Behaviour

Costs Classification

The following costs elements are “Direct Material”, “Direct Labor” and “Other relevant cost of Production” and these elements of costs are classified as the direct cost and indirect cost of any product that has to be ...