Question

take the role of mentor to a new project manager within your organization. This assignment focuses on guidance the mentor provides the new project manager regarding cost.

Cost serves several purposes for an organization: (1) planning and budgeting, (2) assisting in decision making, (3) comparing actual to budget (control), and (4) calculating income generated from operations and projects (score-keeping). Select one these areas and prepare a short document outlining the following items:

• Identify one of the cost purposes listed above.
• Select two of the five cost classifications described in the text: financial statement presentation (cost function): cost behavior, assigning costs to products and services, costs for decision making, and cost of quality (see page 75).
• Describe how knowledge of cost, as described within its classification, is needed to effectively manage costs and improve the success of a project for the stated purpose.

Answer 1

Cost serves several purposes for an organization:

(1) planning and budgeting,( Discussed below)

(2) assisting in decision making,

(3) comparing actual to budget (control), and

(4) calculating income generated from operations and projects

Planning and Budgeting

Planning and Budgeting is an analytical application that helps you set top-down targets and generate a bottom-up budget, which is at the foundation of your organization's operations.

Financial Presentation of Budgets- Cash Budget

Beginning Cash Balance	xxx	xxx	xxx	xxx	xxx
Add: Budgeted Cash Receipts:	xxx	xxx	xxx	xxx	xxx
Total Cash Available for Use	xxx	xxx	xxx	xxx	xxx
Less: Cash Disbursements	xxx	xxx	xxx	xxx	xxx
Direct Material	xxx	xxx	xxx	xxx	xxx
Direct Labour	xxx	xxx	xxx	xxx	xxx
Factory Overhead	xxx	xxx	xxx	xxx	xxx
Selling and Admin. Expenses	xxx	xxx	xxx	xxx	xxx
Equipment Purchases	xxx	xxx	xxx	xxx	xxx
Total Disbursements	xxx	xxx	xxx	xxx	xxx
Cash Surplus/(Deficit)	xxx	xxx	xxx	xxx	xxx
Financing:	xxx	xxx	xxx	xxx	xxx
Borrowing	xxx	xxx	xxx	xxx	xxx
Repayments	xxx	xxx	xxx	xxx	xxx
Interest	xxx	xxx	xxx	xxx	xxx
Net Cash from Financing	xxx	xxx	xxx	xxx	xxx
Budgeted Ending Cash Balance	xxx	xxx	xxx	xxx	xxx

Cost behavior

Cost behavior analysis refers to management's attempt to understand how operating costs change in relation to a change in an organization's level of activity. These costs may include direct materials, direct labor, and overhead costs that are incurred from developing a product.

Activity	Cost Driver (activity)	Overhead Cost	Estimated Units	Rate
Purchasing Materials	Pieces of materials	xxx	In pieces	xxx	per piece
Machine Setups	Machine setups	xxx	In setups	xxx	per setup
Inspections	Inspection hours	xxx	In inspect. hours	xxx	per inspect. hour
Running Machine	Machine hours	xxx	In mach. Hours	xxx	per machine hour

Assigning Cost to Product and Services

Overhead costs are allocated to products by multiplying the predetermined overhead rate for each activity by the level of cost driver activity used by the product. The term applied overhead is often used to describe this process.

For Eg:

Activity	Goods	Services	Total
Purchasing materials	xxx	-	xxx
Rent	xxx	xxx	xxx
Running machines	xxx	-	xxx

Importance of Knowledge of Cost

The cost information system plays an important role in every organization within the decision-making process. An important task of management is to ensure the control over operations, processes, activity sectors, and not ultimately on costs. Although in reaching the goals of an organization compete many control systems (production control, quality control and stocks control), the cost information system is important because it monitors the results of the others. The detailed analysis of costs, the calculation of production cost, the loss quantification, the estimating of work efficiency provides a solid basis for the financial control.