Question

It is budget time and the CEO has asked you to develop a presentation on cost concepts and how it is used in decision making. As the Director of Budgeting and Finance, you have been tasked to present the presentation to all directors, supervisors and physicians. The CFO has ask you to address the following:

• How and why do we classify cost?
• Discuss the four major categories of direct and indirect cost and explain each. Give examples of each.
• What is the difference between controllable and uncontrollable cost, give an example of each.

PLEASE USE EXAMPLES AND DETAILS

Answer 1

For any good business, cost is the major component for expenses. The basis for business wealth maximization is the cost benefit analysis. We classify cost as per direct and indirect cost.

The four major categories of direct and indirect cost are as follows

Direct Cost are those cost which can be conveniently identified with and allocated to the product

1. Direct material

Direct materials are the cost of material used for the products directly.

2. Direct labour

Direct labour are the cost of wages and salaries for the labour used in the making of product

3. Direct expenses

Direct expenses are the expenses related to product specific activity

Indirect Cost are the such as fuel, lubricating oil, small tools, and material consumed for repairs and maintenance work, miscellaneous stores

1. Advertisements:

Indirect labour which includes promotional activities for the product design and promoting of the products.

2. Office and Administration Overheads

All indirect expenses relating to admin, staff and other office works can be related to this

3. Selling and distribution overheads

Cost incurred for the selling and distribution expenses relating to product sale

Controllable cost are those cost which can be controlled by reducing the costs and improvising the business techniques.

These can also be called as internal costs .Eg, usage of electricity, materials, etc

Uncontrollable cost are those cost which are beyond control of person and cannot be controlled in any kind of situation.

Eg Govt taxes which are mandatory to be paid, Rent to be paid in case of leased premises.