Question

Costs can be categorized in various ways, including the following:

• Fixed versus variable costs
• Relevant versus irrelevant costs
• Direct versus indirect

Discuss the following in your main Discussion Board post:

• Why is it important for a company to know the categorization of each cost?  
• Provide an example of each of the cost categorizations above.
• Why is it important to compare actual cost and budgeted cost?

Answer 1

	Fixed cost, Variable cost, Direct Cost and Indirect cost, Relevant and Irrelevant cost with example
1)	Variability	Fixed Cost: Cost which remains constant in total Variable Cost: Cost which changes with production	Fixed cost: Factory Rent Variable cost: Cost of Raw material
2)	Traceability to object	Direct Cost: Cost which can be allocated directly to the product. Indirect Cost: Cost which cannot be directly allocated to the product.	Direct Cost: Wood used in furniture. Indirect Cost: Nails used in furniture
3)	Decision Making	Relevant Costs(Marginal Costs, Differential Costs, Opportunity Costs, Out of Pocket): Cost which are relevant and useful for decision making Irrelevant Costs(Sunk costs, committed costs, fixed costs): Costs which are not relevant or useful to decision making	Relevant Cost: Cost of Best Possible Use Irrelevant Cost: Cost incurred in the past-Advance Payment

Cost classification is necessary for management decision making to achieve the target of maximization its profit.

Actual cost and Budgeted cost : It is the cost which actually incurred, but budgeted cost is the projection .Before starting any project or before taking any decision, management make projection of cost. After that compare budget with actual, and find the reasons for variance. For example of Budgeted Material cost is less than actual it is unfavorable. The reasons for such unfavorable will be poor quantity of raw material, not properly utilization of raw material etc. To find such variance is necessary to take timely action to control these variances.