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CostAnalysis_JRover_112317.docxRunning head: ORGANIZATION COSTS 1
ORGANIZATIONS COSTS 4
Cost Analysis
Accounting for Business Managers
Rasmussen College
Jeff Rover
11/23/17
Introduction
Cost is a term which explains the value of money. It arises in a situation whereby an individual offers some services or produces something. Every organization incurs different costs in their daily activities (Braun et al., 2014). It is very important that they ensure that the cost does not exceed the cost of production in order for them to make profit.
Types of Cost
By the fact that cost is the sacrifice of forgoing something to get something else, organization incurs different types of cost in their operations of which, some costs are under their control while others are not (Chen, 2015). Every management, therefore, must understand this cost to know how to handle them when they arise.
Variable Cost
Variable cost is a cost which keeps on changing (DRURY, 2013). They usually vary with the change in the level of production. For instance, such expenses include the cost of acquiring resources, the direct labor among others. One cannot be in a position to come up with a budget for this expense because they are unpredictable.
Fixed Cost
They are the kind of costs which one can be in a position to budget for them. They do not change over a certain period (Braun et al., 2014). The cost is the same all through for several months. An example includes the depreciation of fixed assets which is something which can remain the same all through for a longer time.
Sunk Costs
The fact that an organization deals with various activities under one roof, they also deal with situations whereby equipment which was purchased before are no longer useful in the new product line (Chen, 2015). The situation whereby equipment which was long time useful and they currently do not offer any services is what is considered as the sunk cost. It is referred to sink cost in the situations whereby it cannot be sold. The cost is fixed because no changes can be made to it. However, this kind of expenses does not affect the future financial decision of an organization.
Opportunity Cost
Opportunity means having different alternatives but choosing the one with the highest return. In this case, a firm considers the different alternatives and chooses the one with the best outcome for the success of the business (DRURY, 2013). In the process of choosing the best option a company might incur some losses, and this is what is known as the opportunity cost. An example is in situations where the company want to buy new equipment to expand the business; it incurs an opportunity cost of not investing the money in another investment.
Direct Cost
The issue of direct or indirect cost arises in a situation whereby an organization is trying to see whether they can trace the cost (Braun et al., 2014). If a cost can be traced directly, then that is a direct cost. An example is in situations whereby a particular raw material is used to make a particular type of food then it can be traced directly.
Indirect Cost
Examples of Each Type of the Cost and the Way the Cost Will Be Used During the Manufacturing Process
Fixed Cost
An example of the fixed cost include rent, property taxes and the admin salaries (DRURY, 2013). The cost might remain the same for a certain period before a systematic change is done. The cost is used during the manufacturing process like in a situation whereby the manufacturer might decide to expand the capacity to cater for the rise in the demand for the products.
Variable Cost
In this case the cost change respectively to the level of the output. The cost is involved in the manufacturing process by determining the unit cost of a product. The more units produced, the higher the variable cost increases. When a firm hires more staff then the salary for the staff goes higher (Braun et al., 2014). Another example is in a situation whereby the workers work for long hours then the cost increases and vice versa. In a situation whereby the demand is low then that means few units will be produced hence leading to lowering the cost of production.
Direct Cost
An example of a direct cost includes the main components of the product manufactured (Weygandt et al., 2015).They are mostly categorized into the direct material, direct labor among other direct expenses. An example of the direct expenses in the manufacturing process is in a situation where one is making a certain particular type of food, and the major component of that particular type of food is eggs.so the cost of the eggs which is the direct material can be easily traced.
Indirect Cost
They are the cost that one cannot trace directly (Chen, 2015). An example is the cost of utility.in an organization more so during the manufacturing process there is the cost of a utility bill that arises. In this case, one cannot be in a position to specifically associate the expense with a particular product.
Sunk Cost
Sunk expenses are the money which is already spent permanently. An example is in a situation whereby one buys a nonrefundable train ticket. One cannot get to their office and claimed a refund in case one does not use it (Braun et al., 2014). The cost will not affect the future decision. The expenses will not affect anything during the manufacturing process because it is already recorded in the books of accounts.
Opportunity Cost
An example of an opportunity expenses is in a situation whereby an organization is planning to expand its business by buying a land in another location (DRURY, 2013).In this case, the same money that the firm is using to buy a land could be used to increase the units of production.in this case the management chooses the best alternative which would have more profit to the business. The cost will be in use during the manufacturing process because they assist one to know which activity is more profitable than the other.
The Importance of These Costs in Managerial Accounting.
Everyday business owner encounters challenges in the process of decision making (Weygandt et al., 2015). The importance of these costs which are in the administrative bookkeeping provides them with the data to make a wise decision which can improve the process of decision making over a long period. There are various benefits of the managerial accounting which include.
Assist in Future Planning
The managerial accounting answers the question which arises in the process of planning for future (Braun et al., 2014). It gives the stakeholders the trend in which a firm is growing with and indicates what one should improve on to increase the profitability.
Help in Proper Decision Making
The cost of managerial accounting assist one to know which project to undertake and which to forgo (Chen, 2015). In this case, it gives a good report on the best opportunity which will yield a company the highest return with less cost.
Enables One to Make the Pricing Decision
The records from the accounts assist one to know the how much an organization spends to produce a product.it also ensures that the producer is aware of the pricing trend in the market (Braun et al., 2014). It enables one to know where to raise the prices below the competitions or to make it higher.
Conclusion
For any organization to operate the issue of managerial accounting successfully is very important.It provides the management with a wide range of information concerning all the cost that is involved in the process of manufacturing.It is also a better way to ensure that the administration makes the appropriate decision which will cater for short-term and long-term goals.
References
Braun, K. W., Tietz, W. M., Harrison, W. T., Bamber, L. S., & Horngren, C. T. (2014). Managerial accounting. Pearson.
Chen, X. (2015). Variable Costs, Fixed Costs, and Entry Deterrence.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.
