Identify different kinds of cost an firm would incur

In management accounting there are several ways of classifying different types of cost. These classifications rely in line with the immediate need of management. I've classified different types of cost and also have explained each of them below.

Cost classification

Cost elements

Direct cost

Direct materials

Direct labor

Direct expenses/ overheads

Indirect cost

Indirect materials

Indirect labor

Indirect bills/ overheads

Types of cost

Fixed cost

Variable cost


Marginal cost

Cost element

A cost is incurred in purchase raw materials to producing completed goods, administrative, marketing and retailing activities. These costs are normally classified by manufacturing companies as immediate and indirect costs.

Direct cost

Direct costs are all those cost that are straight associated with the production of goods and services. The direct costs can be further divided into 3 main categories.

Direct materials costs

Direct Material is the original material that switches into the final product and can be followed back to it from the completed product.

E g: - An organization that manufactures note books use documents, ink, stapler pins, machines and labors for producing catalogs. Here the documents, ink and stapler pins will be the direct material for this company. So any cost incurred in buying and handling of these recycleables can be studied under the direct raw material costs.

Direct labor costs

Direct labor cost is the price of employees or employees directly mixed up in creation of goods or something.

E g: - Fixed salary of a worker mixed up in production brand; that is in some part of development like cutting documents, binding documents etc.

Direct expenses / overheads costs

The cost of services which involved producing done product or bills included particular development.

E g: - Chargers for electricity usage for the machine used to make the note catalogs in a book manufacturing company.

Indirect costs

Indirect costs are the ones that are not directly mixed up in production of the nice or services. These costs are crucial part of producing the final product. The indirect can be further divided into 3 main categories.

Indirect materials costs

Indirect Material is not the original material that goes into the ultimate product and can be tracked back to it from the done product. It is the materials or tools that can make the production of goods or a service efficient and easier.

E g: - Within a government manufacturer, the sewing machines, stamping machines etc. could possibly be the indirect materials as these machines aren't an integral part of the final product (clothes).

Indirect labor cost

Indirect labor cost is the expense of employees or employees not directly mixed up in development of goods or something. Quite simply it's the work or task done by an employee that will not produce any products but this service is necessary for the success of the concluding point of the creation.

E g: - The income of inspectors, store keeper, watchmen, machine maintenance etc.

Indirect bills/ overheads costs

Indirect expenses are the expenses aren't directly associated with the production of any good. These costs are priced to the final product.

E g: - Advertising and administrative expenses, telephone expenses etc.

Types of costs

Cost can even be classified based about how frequent they react to production.

Fixed cost

Fixed cost is the price that never changes over a period. And also it generally does not increase with the result of the company.

E g: - Lease, wages of everlasting staff etc.

Variable cost

Variable cost is the cost which maintain of the source that vary with the development level. These cost change in the short run.

E g: - cost of raw materials, wages payed for the staff member of the creation line.

Semi adjustable cost

Semi adjustable cost is composed of an assortment of fixed and changing elements. Therefore it also called as semi fixed cost. Additionally it is described those cost that continue to be as a set cost until a particular level at which it becomes adjustable.

E g: - regular hire for a mobile phone may be recharged with call charges. Here the local rental is set as the call charges are adjustable.

Explain with examples why different costing methods are used by organizations in the modern context.

Costing methods are being used by companies as opportinity for charges or stock valuation and to control business or even to assist in managerial decision making. Costing methods are very important in accounting to make the right decision for the success of the organization. If the company didn't make the right decision at the right second, it'll be a reason for the downside of the organization. Now i want to show you several reasons why these methods are Applying in a business.

To decide buying or making a product more profitable for the business.

To decide whether to accept or reject an order put by the consumer.

Make decisions of extending business to international level by employing foreign countries.

To decide extra shifts or extra work in a production of something or reducing development.

To plan how much profit is needed or measure the capacity of the income of the business.

To determine whether to shut down the company if it is making continues damage or to try to increase the business if there any chance.

A company starting out might use the chance even concept to determine and find out at what level the business can start gaining profits and of which level the company will be suffering a loss.

To decide if the current herb is working out or not and to decide if replacing the existing plant is going to be profitable for the business or not.

To opt to star production of a new product or to stop the production of an existing product.


Costing for costing and stock valuation

Job costing

This method for costing is used where the costing is performed separately for every single product. Therefore job costing is mainly used in a situation where the products produced or service provided derive from a particular specification of the client or many goods are made for charging done individually. The productions of the goods are higher due to the fact that they are orders located by customers.

E g: - Job priced at used in structure industry because the constructions predicated on the orders positioned by the clients. Here the expenses are calculated separately for every single building.

Batch costing

Batch costing means all the set and variable cost which is incurred when producing a batch or a couple of products. Here lots of products are used as a single job altogether. The machine cost of a batch of products can be computed by dividing the batch cost by the number of items produced.

E g: - A shoe manufacturing company may produce 100000 products monthly. These 100000 products may be labeled as a batch at that one date and cost is calculated for the whole batch taking all products as a single job.

Contract or terminal costing

Contract costing is also very much like job costing. It really is usually hook up with site based work, by the necessity s of the customers' undertaken and relatively long length.

E g: - Company mixed up in construction industry might use this method as specific customers place different deals which last for several years or accounting times.

Process costing

Process costing is found where the product proceed through various stages as it would go to the finished product. Products which are made by combining different parts of the ultimate product are also like the process priced at method. The following is terms are also used under process costing.

Operation costing

Single or outcome costing

E g: - A done computer moves through various techniques. To begin with are made individually and they're fixed collectively in the final progress. Because of this product the costing is determined based on the procedure.

Operation charging or service costing

Operation costing method is employed by companies which doesn't have a specified finish off product as the end result like the service industry.

E g: - Service of the lecture

Departmental costing

Here the costing of the merchandise is dependant on the departments at which they can be produced. Costs of products are calculated as how cost and of which department.

E g: - Media papers are created at different departments.

Multiple priced at or amalgamated costing

Multiple costing put on calculate the cost for the merchandise which have an extremely complex creation. For these types of products one charging method may well not be enough. Therefore they use several costing methods in calculating.

E g:- Products like vehicles, airplanes etc. the full total cost is based upon a mixture of sub prices determined in the work costing and service costing etc.

Control and managerial decision making

Activity centered costing

It is the attribution of costs to cost products based on the benefits received from indirect activities.

E g: - Cost of quality adjustments is spread on the list of items produced and each includes a part of this expense.

Historical costing

Historical costing is ascertaining costs after it have been incurred so that costs can be compared over different period.

Direct costing

All immediate costs are billed to the finish product and all indirect products are costed to make money and loss.

Absorption costing

Here both varying and set costs are taken as a complete cost and incurred on the merchandise.

Marginal costing

In this costing method the variable costs are used as opposed to the full cost of production and total fixed costs are deducted to obtain the loss or profit.

Collect creation details from any corporation that produced three products, analyze and present these data.

Propose the terms output, efficiency and performance and evaluate its effect on any selected company.

Explain the terms production, efficiency and effectiveness and evaluate its impact on any selected group.

The modern environment to owning a company specifies that output, efficiency and success are important for the success of the organization and also for the survival on the list of competitors available field. This is based on the actual fact that certain company which is not concerned with these matters is really on a worthless path and could easily lead the business to come quickly to an end of business.


Productivity is a way of measuring output from a production process, per unit of input. It is fairly similar to efficiency as output also measures the same as efficiency. However efficiency is an results from the amount of success and efficiency or by the way of increasing the efficiency and efficiency productivity also increase. A couple of two way to gauge the productivity of any company as I shown below.

Productivity = Output


Productivity = Value of end result / time

In the above mentioned formulae enough time can be many different factors such as energy, resources etc. And the value of result is the defined quality of output by the organization.

Productivity = End result > Amount of achieved goals > Effectiveness.

Inputs > Amount employed resources > Efficiency.

However enhanced output always defines alternatively value of a business as follows

Can limit the waste materials of resources.

Company always can preserve the increasing demand.

Company easily can faces to your competition of the market.

Employee development also boosts.

Manufacturing quality boosts.

Production cost can get low and buy prizes can constrained.

Net profit boosts.

There are five ways that can helps to enhance the output as I have shown below.

Enhancing the result, when the inputs keeping as stet.

Output keeping as stet, when as the insight decreasing.

Enhancing the end result, when as the source decreasing.

Enhancing output alternatively than improving inputs.

Decreasing inputs somewhat than reducing inputs.


Efficiency is dong the thing right. In other words contribute the resources by minimum amount wasting to attain the organizational goals and targets or the way to make use of the resources to achieve the organizational goals and targets. Efficiency is closely related to the production.

E g: - An organization that produces shoes could be said productive if it melts away all the resources in order to output as much products or services. It company reaches criteria maybe it's labeled as an efficient company.

Efficiency = total outcome/ total source.

Now let me evaluate its impact on ABC Company and XYZ Company

E g: - Company ABC produce 50 tables in 10 days and nights and company XYZ produce furniture in 120 tables in 20 days.

Based on these calculations we can see that the company XYZ is better as with the ability to produce 6 tables per day in comparison to company ABC which can only just produce 5 products per day.


Effectiveness is doing the items right. Quite simply achieving the correct targets in the given period or deciding the right things. Therefore performance is the liability of the company to achieve the set goals and objectives. Effectiveness is assessed by result in terms of the collection target by the business.

E g: - A corporation is producing cell phones. The company would like to earn at the least $100000 profits in a single month and has established a focus on of producing 5000 mobile phones in order to attain the revenue. And after per month the company can make 6000 cell phones.

Effectiveness = 6000/5000

Effectiveness = 1. 2

However Efficiency and Efficiency always expresses the relativity between each other's to the Management the following

How it is performed?

In the wrong manner, correctly,

Ineffectiveness & Inefficient Efficiency but Ineffectiveness

[Die fast] [Die Decrease]

Effectiveness but Inefficient Efficient & Effective = Management

[Survive] [Strive for success]

The best approach for a company will be a mix of both efficiency and success. It is because without effectiveness a competent company will eventually meet the incorrect conclusions and without efficiency a highly effective company cannot gain the utmost revenue or may be in loss. By getting the perfect mixture of these a corporation can save time and stress to get more profits.

Explain at length the concepts of Quality & Value and exactly how it is put in place in organizations.

An introduction to quality management

Quality control can be traced back to a long time ago in workmanship and during building the pyramids. Here a get good at craft man looks after all the art to see whether they satisfy the required quality needed. It had been then used in all areas of arts to make certain a good end product was created to satisfy the customers. This concept transformed as US introduced assembly lines in creation by dividing the merchandise into interchangeable parts. Later japan have modified quality management in their business and identified quality management as a continuous improvement (which never ends).

What is quality?

Quality is the ongoing process of building and sustaining associations by examining, anticipating and gratifying stated and implied needs. There are many ways of measuring quality and different people view quality with regards to different criteria.

It can be a measure of excellence where in fact the product is clear of all types of defects.

Quality can also be how much the company, service or product can satisfy the clients or how much they meet up with the customer goals.

It maybe also a strategy set by the company for a characteristic such as how much heavy, light, smooth, tall, Thick or skinny etc.

Reducing waste products created in the production process or using the misuse in creation of other goods.

The quality is how uniform the end products are, with as bare minimum variations possible.

Quality management

Quality Management ensures the client self-assurance and better efficiency within company. Therefore permit the company to better compete with others available field. It involves several stages Quality control, quality confidence and quality improvement.

Quality control is a way of making certain finished products are reliable, appropriate and money-wise better to meet a standards determined by the company. Quality control involves certain testing performed at the end to determine if the product matches the placed quality. In essence quality control is marinating the quality within certain restrictions.

Quality assurance is ensuring that the products surpass the customer expectations. Quality assurance is more process oriented as the quality control is more concerned with the product. Quite simply quality confidence is making sure that all the finish products are free of flaws. PDCA (Plan Do Check Action) is a highly effective way for monitoring quality guarantee.

Quality improvement is an approach where ongoing process is examined and systematic attempts are put to improve it. It focuses on areas like:-

In industry: product failures or work-related injuries etc.

In administration: increasing efficiency or reducing re-works etc.

In medical practice: reducing medical problems and needless fatalities etc.

Principles of quality for just about any organization

"Create constancy of goal towards improvement". Replace short-term reaction with long-term planning.

"Take up the new philosophy". The implication is the fact that management should actually adopt his philosophy, somewhat than basically expect the labor force to take action.

"Cease reliance on inspection". If variety is reduced, there is no need to inspect manufactured items for defects, because there will not be any.

"Move towards a single supplier for just about any one item". Multiple suppliers imply variance between feedstock.

"Improve constantly and forever". Constantly make an effort to reduce variance.

"Institute training on the job". If people are inadequately trained, they will not all work the same way, and this will introduce variance.

"Institute leadership". Deming makes a differentiation between leadership and mere supervision. The latter is quota-and target-based.

"Drive out fear". Deming views management by fear as counter-productive in the long run, because it prevents workers from behaving in the organization's best interests.

What is value?

Value means magnitude to which a good or service is identified by its customers to meet his / her needs or want, assessed by customer's willingness to pay for it. It commonly is based more on the customer's notion of the worthy of of the merchandise than on its intrinsic value.

Principle of value for any organization

Anticipation: the anticipated future advantages to be produced from the house.

Balance: the equilibrium come to in a free of charge market when complementary used of neighboring property permit maximum value for individual properties and the neighborhood.

Change: the continuing effects of economic, interpersonal, and governmental forces on the house and its environment, resulting in ongoing change in market value which must be predicted.

Competition: the trend of an extremely profitable use to be duplicated by others until an excess supply of similar goods and services reduces success, and thus value.

Conformity: the creation of maximum market value through a reasonable amount of similarity of property use, appearance, and owner demographics.

Consistent use: the requirement to value all areas of a house: land, improvements, and personal property based on a single course of consumption at any given time.

Identify and asses potential improvement tools and techniques that modern business use.

Many advancements can be taken to organizations by using tools and techniques. Quality experts have released many different theories which can help an organization in discovering and evaluating potential advancements.

Deming's 14 factors summarized

Create constancy of purpose towards improvement - replace short-term reaction with permanent planning.

Adopt the new viewpoint - likewise by management and individuals.

Stop depending on inspection- if version is reduced; there is no need of inspection because there are no any items for flaws.

Choose quality suppliers over low priced suppliers - to reduce variation in raw materials and offer.

Improve constantly - to lessen variation in all aspects e. g. :- planning, development, and service.

Set up training face to face - to reduce radiation for professionals and staff in how job is performed.

Leadership not guidance - to motivate people and have the best output from them not simply to meet the targets.

Drive out dread - encourage two way communications and make interest for employees to work in the organization.

Break down interior barriers - interior departments have to work together as interior customers.

Eliminate slogans - processes make problems not people. Management harassment of staff will create bad relations if no effort made to improve techniques.

Eliminate management by goals - management by objectives encourages legislations quality goods.

Remove barriers to gratify workers - including annual appraisals.

Encourage do it yourself improvement and education for everybody.

Everyone is in charge of continual improvement in quality and production.

("W. Edwards Deming - Total Quality Management & Deming's 14 items". Mftrou. com management for ordinary people. - Cited on July 27, 2010. )

http://www. mftrou. com/edwards-deming. html.

The Deming circuit (PDCA pattern)

The Deming routine is a process which include four stages. It really is mainly used for solving problems running a business. The Deming cycle also known as as PDCA circuit. PDCA stands for



Study (check)


Plan - identify a chance and plan an alteration.

Do - test the change and do something in control.

Study - analysis the results.

Act - take action based on what you discovered in the analysis step. If you are not satisfied with the change, start going through the cycle from the beginning with another plan and if you are successful take action to increase the process.

Six Sigma

Six sigma is a data- driving a car way for quality improvement. It detects and eliminates the defects in production process by focusing on outputs. It focuses on client satisfaction and outcome results by minimizing variation and waste. Therefore it applies anywhere variation and waste are present. You will discover two sub methodologies of Six Sigma. That is six sigma DMAIC and six sigma DMADV.

Six sigma DMAIC is an improvement system for enhancing a preexisting process by inspecting the defects in the long run products and getting rid of them.


Define the project goals and customer (inside and exterior) deliverables


Measure the procedure to ascertain current performance


Analyze and determine the primary cause(s) of the defects


Improve the procedure by eliminating defects


Control future process performance

Six sigma DMADV can be an improvement system used to develop new process or product at six sigma level quality.


Define the project goals and customer (inner and exterior) deliverables


Measure and determine customer needs and specifications


Analyze the process options to meet the customer needs


Design (complete) the procedure to meet the customer needs


Verify the look performance and ability to meet customer needs


This is japan word for ongoing improvement to the production of organizations. Kaizen goals are set up each year within the planning process that's how Kaizen costing engaged to process. This plan involves everyone in the organization working along to make advancements focusing on removing waste materials on all process starting with the place of work. It relies on human resources alternatively than capital purchases.

Kaizen principles

Human source of information is the most valuable company resources.

Process must be improved by steady improvement alternatively.

Improvement must be predicated on evaluation of process perform.

Five elements (base) of Kaizen


Personal discipline.

Improved morale.

Quality circles.

Suggestions for improvement.

Tools for mapping processes


Flowchart represents an activity which consists of many different types of steps. Flowchart divides the huge process into small duties within an order. Mostly circulation charts can be used to analyze an activity and to separate an activity into different phases. With the motive of that, many can require in particular level. A flow graph comprises of different shapes attracted for different incidents and everything the happenings are joined collectively by arrows from begin to end.

Work move diagram

Workflow diagrams are very similar to stream graphs. Graphical picture of steps considered, time put in, and distance journeyed and other aspects of the way a particular good article is performed. Workflow diagram is suitable for displaying the over view of an business process.

Value added flowchart

The value-added movement chart also known as value stream map. It really is a method to improve cycle times and efficiency by visually separating value-adding from non-value-adding activities.

Tools for ideas generation and finding connections

Cause and effect diagram (fish-bone diagram)

Cause and result diagram was invented by Kaoru Ishikawa. Therefore is also called as the Ishikawa diagram. Cause and results diagram is also known as as seafood bone diagram just because a completed diagram can appear to be a skeleton of the fish. It really is a diagram which makes out all the complexities or inputs that cause an effect or output. This method combines the brain storming with a kind of a concept map. Triggers are arranged regarding to their importance. This can help to recognize sub causes and check in which a problem might be induced and helps to compare the importance of different causes. And also fish bone diagram can assist in organized analyzing of the problem.


Brainstorming created by Alex Osborn who is the creator of the Creative Education Basis. This is a robust tool that creates ideas, solves problems, motivates and produces groups. In brainstorming generally participants from a merged group, joins alongside one another for a brain storming program. The brain storming session is held usually in an wide open space where customers can feel absolve to point out their ideas. All the customers keep adding their opinions on a specific subject and also on other ideas provided by members. At the end of the brain storming treatment the complete problem will be known and resolved as necessary.

Relations diagram

Relationship diagrams show all the partnership between factors or areas of a process. It can help to identify the key areas which may be driving other factors. Alternatively of a process shown in a string, this diagram shows the regions of the process which have effects on the areas and links all of them. Therefore you can find which the areas that contain the most impact.

Tools for data collection and analysis


It is used to graphically summarize and show an allocation of a process data set. It really is built by dividing the data into different classes or bins in the x-axis and determining their consistency in the y-axis. As u can easily see in the physique 6 a histogram appears like a pub graph. But its frequency is taken depending on school width which may differ unlike in a club graph.

Scatter gram

A scatter diagram is a tool for evaluating the relationship between two variables where one variable is plotted in the horizontal axis and other variable is plotted in the vertical axis. It could be used to recognize whether or not a reason and effect romantic relationship exists between your two variables. Inside a scatter diagram higher relationships are shown with close details or points along a curve or line. And in case the partnership is low or no relationship is shown with factors dispersed throughout the diagram with no logical collection.

Control chart

Control charts also called as statistical process control are a kind of chart that is used to control the product quality or to take care of the quality inside a certain level. It identifies the quality of an activity and displays them in the form of a range graph with set in place upper and lower limits. It can also have a middle or middle brand for average. These lines are manufactured based on the historical data. The control chart identifies the way the process changes as time passes and information them in enough time order.

Pareto analysis

Pareto analysis strategy which can help you chooses the most effective change. The 80-20 theory was initially released by an Italian economist, Vilfredo Pareto. His theory was designed to business program by Joseph M. Juran. Pareto graph is a tool for visualizing the Pareto principal which suggests that a tiny group of problems affecting a standard outcome tends to occur a lot more frequently than the remainder. A Pareto chart may be used to decide which problems to be fixed first and which needs more attention.

Prepare forecasts and finances for business.

Explain in detail the purpose & the type of the budgeting process for an organization just like the Shovel Company.

What is a budget?

A budget is a professional financial plan. Once a company has discovered customer needs & changes through estimating, it needs to decide if it can be satisfied profitably. A budget is an idea expressed in dollar amounts that acts as a highway map to handle an organization's aims, strategies and assumptions. The budget projects the future earnings and expenses. It's the process in which the company decides about how to spend to attain their set aims.

Having a budget is very important for an organization in order to make the most effective decision. Each office in the business will have a separate cover their operations. When all these budgets join collectively we call it a grasp budget. Get better at budget give the summary of what the business wants to attain and how to attain for the next decided time period. The decisions which taken without a grasp budget do not donate to the success of the business enterprise. Associated with, without get good at budget managers not have a clear notion of the goals of the business enterprise. A budget functions five main purposes as shown below.






Main purposes

Communication - The office managers provides their views and justifies the resources that they can need to achieve their goals. This communication between managers and employers help to state mutual obligation to company goals. Here the different departments have to communicate their goals to be able to arrange their views and resources.

Coordination - All employees are prepared of the budget so all of them work as a team in accordance with the budget. This technique accumulates a great bond between your departments. And also creates a common understanding between the organizations.

Planning - A budget must be properly monitored and run appropriately. Therefore managers determine the most effective way to perform the duty. They ask what resources needed and whether a particular activity should be performed and, if so, how to perform it.

Control - The director can make effective decisions based on the budget.

Evaluation - It'll make easier for managers to screen the ongoing process also to provide feedback for the better running of the business enterprise.


Helps to determine the goals and goals.

Can motivate employees by taking part them in the setting up of costs.

Forces management to help make the right decision also to clear the route of the business.

Many reference allocation decisions are created.

Budget is a strategy against which real performance is assessed.

Useful for working out control over an enterprise because of its character as a representation of an idea.

Helps to contain achievable targets.

Helps to recognize short-term problems.

It helps to organize activities by increasing communication between managers and subordinates and between departments.

A good budget is seen as a the next

Participation: involve as many folks as you possibly can in attracting up a budget.

Comprehensiveness: embrace the whole organization.

Standards: bottom part it on set up expectations of performance.

Flexibility: enable changing circumstances.

Feedback: constantly keep an eye on performance.

Analysis of costs and earnings: this can be done on the basis of product lines, departments or cost centers.

Budget preparation

Several key budget factors need to be prepared that will limit the activities of an undertaking before creating a expert budget.

Sales budget

Production budget

Direct materials budget

Direct labor budget

Manufacturing overhead budget

Administrative budget

Cash budget

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