Question

Question 2:

Assume, Mr. Ali, one of your friends completed his graduation in Engineering and wanted to start a small manufacturing company near Salalah, and he intends to get some idea on the cost enunciated hereunder:

i) Classification of cost on the basis of Controllability, and

ii) Classification of cost on the basis of Variability.

Being the accounting specialization student how will you explain him about classification of cost? Explain along with suitable examples.

(, Word Limit 250-350

Answer 1

Answer.

The costs (of manafacturing products) are classified on the basis of elements of cost (Mateial, Labor, and expenses), managerial functions (Production, Administration, Selling and distribuition), Variability( Variable, Fixed, and Mixed) and Controllability (Controllable and Uncontrollable), time, financial account, normality and managerial decission.

(i) Controllability: On the basis of contollabilty of manufacturing and business activities, costs of products are group into two sub catogaries that is controllable cost and uncontrollable costs which are influenced by the actions of the head of responsibility centres.

Controllable Costs are those costs which are controllable by the actions of the lower management. These costs are direct cost like material, labor and direct expenses and some overheads. For example, material cost and labor cost are to be controlled by the purchase and production mangers by minimising price and rate variances of material and lobor, by controlling the wastage of material and labor time, by purchasing better quality of material timely and proper training of lobor forces to handle proper utilisation of material and machine equipments.

Uncontrolable cost are those costs which are not under the controll of management by their actions. This means that there is no controll over such costs and they can not be minimize by the action of managers. Such cost are mostly indrect or fixed cost like rent,Insurance depreciation and salaries of manager which are paid or incurred on the basis of time period.

(ii) On the Basis of Variability or Level of output cost are divided into three sub catogaries.

(a) Variable Cost: Thses costs varies or changes directly in propotion or the ratio of output. Variable cost per unit remains constant but total variable cost inncreases or decreases in the ratio of number of units manafactured. These costs includes direct material direct labor and variable overhead. These cost directly fluctuate with the level of output.

(b) Fixed Costs: These are those cost that remains constant or unchanged irrespective of the levels of output. Total fixed cost remains constant but fixed cost per unit increases with decrease in numbers of units produced or vice versa. Thsse cost includes rent, salaries and insurance expenses.

(c) Mixed or Semi Variable Costs: This cost is combination of variable and fixed cost. Some part of mixed cost are fixed and some part are variable. For example, Repair and maintenance expense, depreciation, and telephone charges remains constant up to certain range but increases suddenly crossing the range. For example the monthly rental charges of telephone and electricity and water supply are fixed but the remaing uses or consuption are variable nature.