Question

Use your selected company or your current work environment to identify at least one cost or expense that would fit under each of the following categories:

• Variable

• Fixed

• Mixed

• Step

Would your company be more likely to benefit from using a manufacturing cost hierarchy or a customer cost hierarchy for determining cost drivers?

Explain your answer and identify one cost for each of the four cost hierarchy categories.

Answer 1

COST ACCOUNTING

Cost accounting is an accounting process it is used to calculate all costs related to production such as Fixed cost,Variable cost.it helps the management to take proper decision .There are four types costs in a business and a selection of one type of cost is not always possible.the different categories of costs are given below:

1)Variable cost

2)Fixed cost

3)Mixed cost

4)Step cost

VARIABLE COST
Variable costs are the costs which vary or changes in response to change in the volume of production.that means the volume of production is high,the variable costs also high.if the volume production is reduced,the variable cost is also reduced.but the variable cost per unit is remains fixed irrespective of the production.it includes direct labour,direct material and direct expenses.

FIXED COSTS

Fixed costs are the costs which does not vary or changes in response to changes in the volume production.that means if the volume of producxtion is high or low the fixed cost is remains same.But it is fixed in the short period,after reaching a certain level of production,the fixed cost per unit will change.it includes salaries&wages,rent&rates.insurance,depreciation etc

MIXED COST(SEMI-VARIABLE COST)

Mixed costs are partly fixed and partly variable.that means the minimum consumption unit reaches the cost will increases.it includes telephone charges,repairs&maintenance,power charges.

STEP COST

Step costs are the costs which increase step by step.that means it is fixed over a range of activity but the level of activity increased the costs is also increases.eg, The emoployees wages is a fixed cost but the work load increases and hiring new workers,the cost of wages also increases

From the above explanation we find out that all costs are its own merits and demerits.all costs are important to every business.I think the volume of production is high The fixed cost method is suitable because the fixed costs remain fixed up to a certain level activity.after reaching the level the costs slightly increases.we gets the benefit from fixed cost in the long run.

If the volume of production is low variable cost method is best.because the costs depends on production.if the production increases the costs also increses.if the production is low the expenses also reduced

MANUFACTURING COST HIERARCHY&CUSTOMER COST HIERARCHY

Cost hierarchy methods are four types.It includes unit level,batch level,product level and facility level

The manufacturing cost hierarchy is included in the four levels:

The unit level: All activities related to production of each unit are included

The batch level:All activities related to the batch of units processed.

The product level:All activities related to the production of a particular product or product line

The facility level: All activities carried out for an entire facility.

The customer cost hierarchy is included in the five levels

The customer output unit level:It includes all activities related sales of the product

The customer batch level cost

The customer sustaining cost:It includes all costs incurred to sustain the customers.eg product positioning,quality maintenance etc

The distribution channel cost:it includes all costs related to market the product.eg,advertising expenses,salary of distributer etc

The corporate sustained cost:It includes all costs related retained the market.eg,top management and administrative costs

The two cost hierarchy methods are used find the production and selling costs of a business.