Question

In managerial accounting, costs can be classified by behavior, traceability decision-making, external reporting , prime costs vs conversion costsand Function Wise Classification. Discuss all the above cost classifications and explain the importance of each classification (300 words)

Answer 1

Answer: In managerial accounting, classification of cost is below:

- Behavior - Cost classification by behaviour is categorized as Fixed Costs, Variable costs and Mixed costs

- Traceability decision - making - This cost is important for the purpose of taking decision making by the management. This is generally important to identify accruate costing of jobs and production of units. This helps management is taking decision which cost is more relevant. Examples of traceability cost is Direct cost and Indirect cost. Direct cost - direct cost relating to material and direct labor, Indirect cost - include overheads like fixed and variabe overheads. Examples for decision making cost - Opportunity cost, Sunk cost, Incremental cost etc.

- External reporting - Cost are generally divided into - Product costs, period cost. Product cost is generally known as cost relating to inventory / item / stock manufactured and recognized in financial statements once sold. For example  it include - Direct material, Direct labour , wages, depreciation, rent etc. Period cost

- Prime cost vs conversion cost - Prime cost is the terminilogy used in manufacturing of the products and usually known as cost directly related to the manufacturing of finished goods / products (for example - direct cost of raw material, labour and direct overheads). While term conversion cost is usually used cost incurred on converting raw material into finished products.. For example: conversion cost include - cost of raw material and and other direct expenditure like labor expenses, factory rent, other manufacturing expenses etc. (directly attributable to a product)