‘‘ Effect of Different Classes of Cost in Decision Making

Course Title: Cost and

Chowdhury Tabassum Shakila

Department of Business AdministrationLEADING UNIVERSITY, SYLHET

Name

Syed Ali Hasan

Abu Ahmed Shahib

Abdul

Ehsan Ahmed Chowdhury

Mahmudul Karim Newaz

Masum Hussain

Section

Department of Business Administration

LEADING UNIVERSITY, SYLHET

Submission date: 21Submission date: 21Submission date: 21Submission date: 21

An Assignment On

Effect of Different Classes of Cost in Decision Making”

Course Title: Cost and Management Accounting

Course Code: ACC - 340

SUBMITTED TO

Chowdhury Tabassum Shakila Lecturer (Accounting)

Department of Business Administration LEADING UNIVERSITY, SYLHET

SUBMITTED BY

Torch Bearer’s

Name ID

Syed Ali Hasan 1201010248

Abu Ahmed Shahib 1201010247

Abdul Motin 1201010219

Ehsan Ahmed Chowdhury 1201010230

Mahmudul Karim Newaz 1201010205

Masum Hussain 1201010202

Section: E Semester: 8th Batch: 30th

Department of Business Administration

LEADING UNIVERSITY, SYLHET

Submission date: 21Submission date: 21Submission date: 21Submission date: 21stststst July, 2014July, 2014July, 2014July, 2014

Effect of Different Classes of Cost in

Management Accounting

Acknowledgement At first, we are grateful to Almighty Allah for creating us in such a beautiful country like Bangladesh and also for controlling our life. For the mercy of him, we got such courage to start this assignment on ‘‘Effect of Different Classes of Cost in Decision Making” After that we want to give thanks to our honorable Head of the Department Dr. Bashir Ahmed Bhuyian for giving us the opportunity to study in this subject. We would like to express our thanks to the Librarian of Leading University for all of his help that we have received. Our respected parents who gave us mental support and inspiration for our assignment, there is a special thanks for them. We also want to give a lot of thanks to our honourable course teacher, Chowdhury Tabassum Shakila for giving us mental support and a clear concept about this assignment.

Without the help of our friends and classmates it was quite impossible to prepare such kind of assignment. They gave us some necessary information about this topic which was unknown to us. So, we would like to give thanks to all of them.

Abstract

Running any business requires immense responsibility. In a company,

managers need to know the logistics of every department, from the cost of a box of

paper clips to the biggest deal made, in order to run it successfully. Managers who

aren’t very involved with their company’s finances don’t usually do well. The

ultimate goal is to make a profit by eliminating unnecessary costs. In order to make an

analysis of this, cost accounting comes into play.

Though cost accounting and management accounting are separate entity but

both of them are interrelated to each other. Management accounting is a broad concept

than the cost accounting because a manager must have to depend on cost accounting

for taking his managerial decision. Cost accounting it is a system that has been

developed to provide managers with a structure to examine the day-to-day finances of

the company, while not having tax factors to worry about. From the information

gathered, managers can make decisions on where to cut costs to improve the

company’s profitability. Cost accounting doesn’t follow any specific standards, such

as the GAAP (Generally Accepted Accounting Principles), as it is not used for

external purposes. A cost accounting system to help managers keep control over the

daily finances and be closely involved in almost every aspect of the business.

Management uses cost accounting, a subset of management accounting, for planning

and controlling operations and for decision making. The guiding light for cost

accountants is usefulness. The cost data must be accumulated, classified, interpreted,

and presented in ways that are useful to managers for decision making. A budget, the

key to planning and controlling, involves cost accounting data. Where to set an

optimal price for a product or service cannot be decided without knowing the cost of

what is to be sold.

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Introduction……………………………………………………..

Objective of the Study………………………………………...

Limitation of the study ……………………………………….. Literature Review…………

i. Discuss about Cost……………………………………..

ii. Different Types of Cost…………………………………

iii. Application of Cost……………………………………..

iv. Advantages of Cost…………………………………….

v. Criticism against Cost…………………………………..

vi. Limitation of Cost System……………………………...

Importance of the Study………………………………………

Group Evaluation ……………………………………………..

Conclusion……………………………………………………

References…………………………………………………….

Introduction

To reach its goal a present-day business has to sail through a variety of odds. Social

and economic environments are quickly changing all over the world especially in the

developing countries due to frequent change in political outlook and switchover to

globalization of economy. A business has to stand firmly on its foot and accept challenge to

face global competition. Protection to industries due to their infancy is unacceptable in the

present day.

Any business has to secure the shareholders fund and generate reasonable return every

year. It has to discharge its social responsibility and look after the human factors engaged in

the business. Changes in governmental outlook creating impact upon the business require

proper adjustment in the management of the business. To keep the most sensitive factor, cool

and properly motivated, any kind of confrontation with the labor organizations should be

tactfully avoided and at the same time, the labor and their organizations shall have to be

convinced that there is nothing to hide from them.

Thus, the present-day management of business grown in size and complexity cannot

be compared with the management of earlier business having no keen competition, no

necessity of adjustment due to changes in social, economic and political outlook.

Globalization of economy has put extra responsibility on the present-day business which the

earlier business had not to bear.

The owner of a business in earlier times could maintain personal contact with the

business and gather all information relating to the business whenever necessary due to the

facts that the business was small in size, no keen competition existed and the business

environment was free from complexity. This situation does not prevail in the present times.

So detailed information relating to the business collected through mechanism established,

appropriate management policy on the basis or the detailed information and proper execution

of such policies can only lead the business to success.

In modern treatment of sick persons various pathological and other information are to

be gathered before prescribing medicine. Exactly in the same manner, modern management

of business requires to gather various information regarding the business before making any

policy decision.

Objective of the study:

Primary objective

The first and most important objective of the assignment is to gather knowledge about cost its

classification and effect of different classes of cost in decision making. Moreover we will

know deeply about the implementation of Cost, Cost Application, Advantages and Limitation

for Appling Cost in an Organization.

Secondary objective

1. Help students to acquire knowledge and skills needed to carry out their rights

and responsibilities.

2. To help students for increasing their thinking skills and decision making

process.

3. Gather information and ideas.

4. Apply questions to decision-making situations.

5. Increasing the vocabulary of students.

6. To identify the causes responsible for increasing the cost of a firm.

7. Help students to use skills in finding, comprehending, organizing, and

communicating.

Limitation of the study: i. Time Limitation: As our submission date of assignment is 22th July we can’t

get enough time to collect necessary data for enriching the assignment. ii. Budgetary Limitation: we are living in developing country & we are also

student that’s why we don’t have sufficient money to spend for betterment of the assignment.

iii. Internet Limitation: In our country the internet service is too slow that’s why we can’t access to internet so easily and find the necessary information regarding the assignment.

iv. Shortage of necessary books: There is shortage of sufficient books in our campus library about this topic.

Literature Review

Costs:

Costs are the necessary expenditures that must be made in order to run a business.

Every factor of production has an associated cost. The cost of labor, for example, used in the

production of goods and services is measured in terms of wages and benefits. The cost of a

fixed asset used in production is measured in terms of depreciation. The cost of capital used

to purchase fixed assets is measured in terms of the interest expense associated with raising

the capital.

Cost accounting

Is a process of collecting, analyzing, summarizing and evaluating various alternative

courses of action? Its goal is to advise the management on the most appropriate course of

action based on the cost efficiency and capability. Cost accounting provides the detailed cost

information that management needs to control current operations and plan for the future.

Businesses are vitally interested in measuring their costs. Many types of costs are

observable and easily quantifiable. In such cases there is a direct relationship between cost of

input and quantity of output. Other types of costs must be estimated or allocated. That is, the

relationship between costs of input and units of output may not be directly observable or

quantifiable. In the delivery of professional services, for example, the quality of the output is

usually more significant than the quantity, and output cannot simply be measured in terms of

the number of patients treated or students taught. In such instances where qualitative factors

play an important role in measuring output, there is no direct relationship between costs

incurred and output achieved.

Different ways to categorize costs

Costs can have different relationships to output. Costs also are used in different

business applications, such as financial accounting, cost accounting, budgeting, capital

budgeting, and valuation. Consequently, there are different ways of categorizing costs

according to their relationship to output as well as according to the context in which they are

used. Following this summary of the different types of costs are some examples of how costs

are used in different business applications ---

Fixed and Variable Costs

The two basic types of costs incurred by businesses are fixed and variable. Fixed costs

do not vary with output, while variable costs do. Fixed costs are sometimes called overhead

costs. They are incurred whether a firm manufactures 100 widgets or 1,000 widgets. In

preparing a budget, fixed costs may include rent, depreciation, and supervisors' salaries.

Manufacturing overhead may include such items as property taxes and insurance. These fixed

costs remain constant in spite of changes in output.

Variable costs, on the other hand, fluctuate in direct proportion to changes in output.

In a production facility, labor and material costs are usually variable costs that increase as the

volume of production increases. It takes more labor and material to produce more output, so

the cost of labor and material varies in direct proportion to the volume of output.

For many companies in the service sector, the traditional division of costs into fixed

and variable does not work. Typically, variable costs have been defined primarily as "labor

and materials." However, in a service industry labor is usually salaried by contract or by

managerial policy and thus does not fluctuate with production. It is, therefore, a fixed and not

a variable cost for these companies. There is no hard and firm rule about what category (fixed

or variable) is appropriate for particular costs. The cost of office paper in one company, for

example, may be an overhead or fixed cost since the paper is used in the administrative

offices for administrative tasks. For another company, that same office paper may well be a

variable cost because the business produces printing as a service to other businesses, like

Kinkos, for example. Each business must determine based on its own uses whether an

expense is a fixed or variable cost to the business.

In addition to variable and fixed costs, some costs are considered mixed. That is, they

contain elements of fixed and variable costs. In some cases the cost of supervision and

inspection are considered mixed costs.

Direct and Indirect Costs

Direct costs are similar to variable costs. They can be directly attributed to the

production of output. The system of valuing inventories called direct costing is also known as

variable costing. Under this accounting system only those costs that vary directly with the

volume of production are charged to products as they are manufactured. The value of

inventory is the sum of direct material, direct labor, and all variable manufacturing costs.

Indirect costs, on the other hand, are similar to fixed costs. They are not directly

related to the volume of output. Indirect costs in a manufacturing plant may include

supervisors' salaries, indirect labor, factory supplies used, taxes, utilities, depreciation on

building and equipment, factory rent, tools expense, and patent expense. These indirect costs

are sometimes referred to as manufacturing overhead. Under the accounting system known as

full costing or absorption costing, all of the indirect costs in manufacturing overhead as well

as direct costs are included in determining the cost of inventory. They are considered part of

the cost of the products being manufactured.

Product and Period Costs

The concepts of product and period costs are similar to direct and indirect costs.

Product costs are those that the firm's accounting system associates directly with output and

that are used to value inventory. Period costs are charged as expenses to the current period.

Under direct costing, period costs are not viewed as costs of the products being

manufactured, so they are not associated with valuing inventories.

If the firm uses a full cost accounting system, however, then all manufacturing

costs—including fixed manufacturing overhead costs and variable costs— become product

costs. They are considered part of the cost of manufacturing and are charged against

inventory.

Other Types of Costs

These are the basic types of costs as they are used in different accounting systems.

Controllable and Uncontrollable Costs—

In budgeting it is useful to identify controllable and uncontrollable costs. This simply

means that managers with budgetary responsibility should not be held accountable for costs

they cannot control.

Out-of-pocket and Sunk Costs—

Financial managers often use the concepts of out-of-pocket costs and sunk costs when

evaluating the financial merits of specific proposals. Out-of-pocket costs are those that

require the use of current resources, usually cash. Sunk costs have already been incurred. In

evaluating whether or not to increase production, for example, financial managers may take

into account the sunk costs associated with tools and machinery as well as the out-of-pocket

costs associated with adding more material and labor.

Marginal Costing:

Marginal costing is a technique of costing in which allocation of expenditure to

production is restricted to those expenses which arise as a result of production, e.g., materials,

labor, direct expenses and variable overheads. Fixed overheads are excluded in cases where

production varies because it may give misleading results. The technique is useful in

manufacturing industries with varying levels of output.

Differential cost:

When a charge is made in the level of output or in product-mix the resulting increase

in total cost is called differential cost. It is important to ascertain differential cost in order to

judge the desirability of effect the change from the point of view of cost, revenue and profit.

Uniform Costing:

A technique where standardized principles and methods of cost accounting are

employed by a number of different companies and firms is termed as uniform costing.

Standardization may extend to the methods of costing, accounting classification including

codes, methods of defining costs and charging depreciation, methods of allocating or

apportioning overheads to cost centers or cost units. The system, thus, facilitates inter- firm

comparisons, establishment of realistic pricing policies, etc. Systems of Costing It have

already been stated that there are two main methods used to determine costs. These are: ·

• Job cost method

• Process cost method

It is possible to ascertain the costs under each of the above methods by two different ways:

• Historical costing

• Standard costing

Historical Costing:

Costs which are ascertained after they have been incurred are historical costs. It may

be found to be similar to diagnosing a disease by postmortem analysis. This is the traditional

costing. So far as cost control is concerned, it doesn’t bear much value.

Historical costing can be of the following two types in nature:

• Post costing

• Continuous costing

Post Costing:

Post costing means ascertainment of cost after the production is completed. This is

done by analyzing the financial accounts at the end of a period in such a way so as to disclose

the cost of the units which have been produced.

For instance, if the cost of product A is to be calculated on this basis, one will have to wait till

the materials are actually purchased and used, labor actually paid and overhead expenditure

actually incurred. This system is used only for ascertaining the costs but not useful for

exercising any control over costs, as one comes to know of things after they had taken place.

It can serve as guidance for future production only when conditions in future continue to be

the same.

Continuous Costing:

In case of this method, cost is ascertained as soon as a job is completed or even when

a job is in progress. This is done usually before a job is over or product is made. In the

process, actual expenditure on materials and wages and share of overheads are also estimated.

Hence, the figure of cost ascertained in this case is not exact. But it has an advantage of

providing cost information to the management promptly, thereby enabling it to take necessary

corrective action on time. However, it neither provides any standard for judging current

efficiency nor does it disclose what the cost of a job ought to have been.

Standard Costing:

Standard costing is a system under which the cost of a product is determined in

advance on certain pre- determined standards. With reference to the example given in post

costing, the cost of product A can be calculated in advance if one is in a position to estimate

in advance the material labor and overheads that should be incurred over the product. All this

requires an efficient system of cost accounting. However, this system will not be useful if a

vigorous system of controlling costs and standard costs are not in force. Standard costing is

becoming more and more popular nowadays.

Incremental and Opportunity Costs—

Financial planning efforts utilize the concepts of incremental and opportunity costs.

Incremental costs are those associated with switching from one level of activity or course of

action to another. Incremental costs represent the difference between two alternatives.

Opportunity costs represent the sacrifice that is made when the means of production are used

for one task rather than another, or when capital is used for one investment rather than

another. Nothing can be produced or invested without incurring an opportunity cost. By

making one investment or production decision using limited resources, one necessarily

forgoes the opportunity to use those resources for a different purpose. Consequently,

opportunity costs are not usually factored into investment and production decisions involving

resource allocation.

Imputed Costs—

Also of use to financial planners are imputed costs. These are costs that are not

actually incurred, but are associated with internal transactions. When work in process is

transferred from one department to another within an organization, a method of transfer

pricing may be needed for budgetary reasons. Although there is no actual purchase or sale of

goods and materials, the receiving department may be charged with imputed costs for the

work it has received. When a company rents itself a building that it could have rented to an

outside party, the rent may be considered an imputed cost.

Applications of different types of costs

Costs as a business concept are useful in measuring performance and determining

profitability. What follows are brief discussions of some business applications in which costs

play an important role.

Financial Accounting

One of the major objectives of financial accounting is to determine the periodic

income of the business. In manufacturing firms a major component of the income statement

is the cost of goods sold (COGS). COGS is that part of the cost of inventory that can be

considered an expense of the period because the goods were sold. It appears as an expense on

the firm's periodic income statement. COGS is calculated as beginning inventory plus net

purchases minus ending inventory.

Financial accounting consists of recording, classifying and analyzing the business

transactions so as to facilitate the preparation of profit and loss account for a period and also

the position statement as on particular date. Thus, the emphasis of financial accounting is on

the ascertainment of profit or loss of the concern and not on the more important aspects of the

business i.e.. Planning, control and decision-making. Cost accounting analyses the

transactions in an objective manner for the purpose of planning, control and decision making.

Depreciation is another cost that becomes a periodic expense on the income

statement. Every asset is initially valued at its cost. Accountants charge the cost of the asset

to depreciation expense over the useful life of the asset. This cost allocation approach

attempts to match costs with revenues and is more reliable than attempting to periodically

determine the fair market value of the asset.

In financial accounting, costs represent assets rather than expenses. Costs only

become expenses when they are charged against current income. Costs may be allocated as

expenses against income over time, as in the case of depreciation, or they may be charged as

expenses when revenues are generated, as in the case of COGS.

Cost Accounting

Cost accounting, also sometimes known as management accounting, provides

appropriate cost information for budgeting systems and management decision making. Using

the principles of general accounting, cost accounting records and determines costs associated

with various functions of the business. These data are used by management to improve

operations and make them more efficient, economical, and profitable.

Two major systems can be used to record the costs of manufactured products. They

are known as job costing and process costing. A job cost system, or job order cost system,

collects costs for each physically identifiable job or batch of work as it moves through the

manufacturing facility and disregards the accounting period in which the work is done. With

a process cost system, on the other hand, costs are collected for all of the products worked on

during a specific accounting period. Unit costs are then determined by dividing the total costs

by the number of units worked on during the period. Process cost systems are most

appropriate for continuous operations, when like products are produced, or when several

departments cooperate and participate in one or more operations. Job costing, on the other

hand, is used when labor is a chief element of cost, when diversified lines or unlike products

are manufactured, or when products are built to customer specifications.

When costs are easily observable and quantifiable, cost standards are usually

developed. Also known as engineered standards, they are developed for each physical input

at each step of the production process. At that point an engineered cost per unit of production

can be determined. By documenting variable costs and fairly allocating fixed costs to

different departments, a cost accounting system can provide management with the

accountability and cost controls it needs to improve operations.

Budgeting Systems

Budgeting systems rely on accurate cost accounting systems. Using cost data

collected by the business's cost accounting system, budgets can be developed for each

department at different levels of output. Different units within the business can be designated

cost centers, profit centers, or departments. Budgets are then used as a management tool to

measure performance, among other things. Performance is measured by the extent to which

actual figures deviate from budgeted amounts. In using budgets as measures of performance,

it is important to distinguish between controllable and uncontrollable costs. Managers should

not be held accountable for costs they cannot control.

In the short run, fixed costs can rarely be controlled. Consequently, a typical budget

statement will show sales revenue as forecast and the variable costs associated with that level

of production. The difference between sales revenue and variable costs is the contribution

margin. Fixed costs are then deducted from the contribution margin to obtain a figure for

operating income. Managers and departments are then evaluated on the basis of costs and

those elements of production they are expected to control.

Cost of Capital

Capital budgeting and other business decisions—such as lease-buy decisions, bond

refunding and working capital policies—require estimates of a company's cost of capital.

Capital budgeting decisions revolve around deciding whether or not to purchase a particular

capital asset. Such decisions are based on a cost-benefit analysis, an estimate of the net

present value of future revenues that would be generated by a particular capital asset. An

important factor in such decisions is the company's cost of capital.

Cost of capital is a percentage that represents the interest rate the company would pay

for the funds being raised. Each capital component—debt, equity, and retained earnings—has

its own cost. Each type of debt or equity also has a different cost. While a particular purchase

or project may be funded by only one kind of capital, companies are likely to use a weighted

average cost of capital when making financial decisions. Such practice takes into account the

fact that the company is an ongoing concern that will need to raise capital at different rates in

the future as well as at the present rate.

Other Applications

Costs are sometimes used in the valuation of assets that are being bought or sold.

Buyers and sellers may agree that the value of an asset can be determined by estimating the

costs associated with building or creating an asset that could perform similar functions and

provide similar benefits as the existing asset. Using the cost approach to value an asset

contrasts with the income approach, which attempts to identify the present value of the

revenues the asset is expected to generate.

Finally, costs are used in making pricing decisions. Manufacturing firms refer to the

ratio between prices and costs as their markup, which represents the difference between the

selling price and the direct cost of the goods being sold. For retailers and wholesalers, the

gross margin is the difference between their invoice cost and their selling price. While costs

form the basis for pricing decisions, they are only a starting point, with market conditions and

other factors usually determining the most profitable price.

Advantages of Cost Accounting

Let us now examine the advantages that are derived from cost accounting. The nature

and extent of the advantages that may be expected from a costing system depends upon the

type, adequacy and efficiency of costing system installed and also upon the preparedness of

management, at all levels, to accept and act upon the advices given by the costing system.

The following are the principal advantages of a well installed and well accepted costing

system:-

(a) Elimination of wastes, losses, inefficiencies: Idle time, lost time, idle facilities,

wastage of materials in the form of spoilage, excessive scarps etc. Can be eliminated

by employing a good costing system.

(b) Cost reduction: By operational research new and improved methods of production

are invented by a good costing system so as to reduce cost.

(c) Detection of reasons for profit or loss: A costing system finds out the actual reasons

for reduction in profit or increase in profit. It identifies the production that runs at a

loss and suggests to the management the way of its improvement or possibility of

shutting it down.

(d) Advices on various matters: Cost accountant, on the basis of cost information, can

advise the management in such a way the management can rightly choose the best out

of many alternatives. Management, without appropriate advice from the cost

accountant, cannot decide whether to buy or make, whether to accept orders below

cost or not.

(e) Fixation of price: Cost accounting helps the management to fix price and to prepare

estimates for submission of tenders etc.

(f) Cost control: Cost accounting, by fixing standards and budgets and comparing the

actual with standards or budgeted figures and finally analyzing the variances, points

out to the management the weak and strong points so that the management can

exercise control.

(g) Assisting the Government, Trade unions etc. : The government uses cost

information for maximum price fixation, price control, tariff protection, minimum

wage fixation etc. Trade unions also use cost information for solving trade disputes

etc.

(h) Marginal analysis of cost: It is done for facilitating short-term decisions, particularly

in times of trade depression.

(i) Fixation of responsibility: For appropriate cost accounting cost centers and

responsibility centers are determined. When responsibilities are properly defined and

fixed on individuals, it becomes difficult to evade responsibility of performance and

as a result, overall efficiency improves.

(j) Helping preparation of final accounts under financial accounting system: Cost

accounts readily supplies the figures for closing materials, work-in-progress and

financial goods. So final accounts can be prepared without any delay for ascertaining

such values.

(k) Prevention of Frauds etc. Thereby helping the management, the Government and

others connected with the organization: By introducing cost audit, frauds can be

prevented; correct and reliable data can be obtained, not only by the management but

also by the Government, the shareholders, the creditors etc.

Criticisms against Cost Accounting

The following points of criticism are sometimes leveled against the costing system:

1. Heavy amount of expense is involved in installing a costing system. It is often argued

that costs involved in installing the system will enhance cost of production, but it

actually reduces cost of production through cost control.

2. Costing system meant for the organization may not suit the organization at all. If the

nature of the business is studied and a costing system suitable for the business is

installed, this criticism does not stand. costing system is to suit the business and not

vice versa.

3. Employees often resist installation of a costing system. This is due to ignorance on

the part of the employees and their suspicion. If employees are properly educated so

that they are in a position to understand the benefits that accrue to them, no such

resistance shall be forthcoming.

4. Instances of failure in many cases are often cited. Failure of a costing system may be

due to defective procedure or due to rejection of the advice of the cost accountant by

the management or due to both.

5. When the old industries prospered without the help of a costing system why the

modern industries should require? Old industries did not have to face keen

competition as the modern industries have to face now. So a costing system is

essential now, just to keep the cost within control, in order to enable the industry to

stand competition.

6. Monotonous work of costing system is another criticism. Where is the absence of

monotony? Is it not present event in daily life? In a costing system, “only forms and

statements are to be prepared” – this is a statement made by many criticisms.

Limitations of Costing System

The real limitations of costing system may be summarized as below:

1. Cost statistics relate to past performances, whereas all decisions are to be taken

about the future.

2. The cost of previous year may not continue to be the same in the current or future

year due to price variations.

3. The cost ascertained on the basis of full utilization of capacity may not be true

when utilization is only partial, for any reason.

4. Non-inclusion of some cost (notional in nature) may reduce cost. Different

methods used in pricing the materials and in absorption of overheads may result in

different costs.

5. Management may believe that, detailed records may give benefit, but they are

costly too.

6. Various management problems may be solve d by value analysis, work study,

time and motion study, operation research and other cost reduction techniques.

Cost accounting fails to tackle such problems.

7. To maintain all records for control, under a costing system, is also very expensive.

8. Delay in receiving costing information does not help the management to take

decision at the right moment.

9. Rigid costing does not serve all purposes.

Importance of the Study:

In management accounting, cost accounting establishes budget and actual cost of

operations, processes, departments or product and the analysis of variances, profitability or

social use of funds. Managers use cost accounting to support decision-making to cut a

company's costs and improve profitability. As a form of management accounting, cost

accounting need not to follow standards such as GAAP, because its primary use is for internal

managers, rather than outside users, and what to compute is instead decided pragmatically.

Costs are measured in units of nominal currency by convention. Cost accounting can

be viewed as translating the supply chain (the series of events in the production process that,

in concert, result in a product) into financial values.

Group Evaluation All types of businesses, whether service, manufacturing or trading, require cost

accounting to track their activities. Cost accounting has long been used to help managers

understand the costs of running a business. Modern cost accounting originated during

the industrial revolution, when the complexities of running a large scale business led to the

development of systems for recording and tracking costs to help business owners and

managers make decisions.

In the early industrial age, most of the costs incurred by a business were what modern

accountants call "variable costs" because they varied directly with the amount of

production. Money was spent on labor, raw materials, power to run a factory, etc. in direct

proportion to production. Managers could simply total the variable costs for a product and

use this as a rough guide for decision-making processes.

Some costs tend to remain the same even during busy periods, unlike variable costs,

which rise and fall with volume of work. Over time, these "fixed costs" have become more

important to managers. Examples of fixed costs include the depreciation of plant and

equipment, and the cost of departments such as maintenance, tooling, production control,

purchasing, quality control, storage and handling, plant supervision and engineering. In the

early nineteenth century, these costs were of little importance to most businesses. However,

with the growth of railroads, steel and large scale manufacturing, by the late nineteenth

century these costs were often more important than the variable cost of a product, and

allocating them to a broad range of products lead to bad decision making. Managers must

understand fixed costs in order to make decisions about products and pricing.

For example: A company produced railway coaches and had only one product. To

make each coach, the company needed to purchase $60 of raw materials and components, and

pay 6 laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing

that making a coach required spending $300, managers knew they couldn't sell below that

price without losing money on each coach. Any price above $300 became a contribution to

the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent,

insurance and owner's salary, the company could therefore sell 5 coaches per month for a

total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each),

and make a profit of $500 in both cases.

Conclusion:

In this work we have analyzed the preprocessing performance in the framework of

imbalanced datasets against other approaches in this problem such as cost-sensitive learning.

We have observed that the approaches used to address the imbalanced problem improve the

overall performance in all the paradigms used in the study, which was the expected

behaviour. The comparison between preprocessing techniques against cost-sensitive learning

hints that there are no differences among the different preprocessing techniques. The

statistical study carried out let us say that both preprocessing and cost-sensitive learning are

good and equivalent approaches to address the imbalance problem.

Finally, we develop a discussion about how to go above preprocessing and cost-sensitive

learning limits. We try to analyze the problem according to the results and we focus on the

problems of costing from different point of view. Specifically, we have emphasized on the

techniques of costing moreover other issues like the class overlapping and dataset shift

problems that arise in some cases and can prove detrimental in terms of classification

performance. Since overcoming these problems is the key to the improvement of the

organizational efficiency, the management body should be more conscious regarding this.

Cost information is part of the basic information needed by managers and policy makers for

making decisions about how to improve the performance of an organization and where to

allocate the resources within or among organization. Cost data are not always available from

routine data systems, due to poor information systems and lack of resources devoted to

organization management. Without quality cost data it is not possible to make accurate

projections, improve technical efficiency, control expenditure and enhance accountability of

managers. A scientific costing system is a very important tool for managements to fulfill

these needs and hence, is imperative for the successful running of an organization

References:

1. Theory and Practice of Costing, Basu & Das, Volume One, 2009 Edition.

2. http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=9623a

3. http://ocw.mit.edu/courses/sloan-school-of-management/15-501-introduction

to-financial-and-managerial-accounting-spring-2004/lecture notes/lec19cost_acc

4. http://www.quickbooks.co.za/product/accounting-software/cost-accounting-importance/

5. http://bookboon.com/en/managerial-and-cost-accounting-ebook