Cost Management

Running Head : Cost management

Cost Management

Cost Management

Cost management strives to determine the cost of the product or the service which the

organization deals in . For a large manufacturing unit , determining the cost of a single unit of

product is a complex task . An organization incurs a variety of cost while attempting to

produce a product or provide service . Generally costs are classified into two major

categories which are

Fixed Cost : Fixed Cost include costs such as cost of maintaining a regular staff

cost of

maintaining the production facility and cost advertising etc

Variable Cost Variable costs include cost such as cost of raw material ,packaging cost , transportation cost etc

Attributing variable costs to a single unit of product is a simple task but assigning fixed cost

to a single unit of product is a complex chore thus in most cases it is never possible to

determine the exact unit cost of a product so managers have to work with a close

approximation

Cost management is an important component of management accounting system because

only by ascertaining the unit costs an organization can decide upon suitable sale price for its

products . It is important that managers regular reevaluate costs because there may be changes

or fluctuations in price of raw material , seasonal hike in labor charges etc

Traditional allocation of cost of advertising and warehousing

As per the present policy of the company the cost of advertising and warehousing are divided

equally among the unicycle and the bicycle business . expense incurred was 5 million and the the traditional 50-

50 policy each of the business is assigned advertising cost of 2 .5 million and warehousing

cost of 1 .5 million .Recommendations for allocation of cost

The traditional allocation method is inappropriate because it does not help in ascertaining the

exact warehousing and advertising cost as applicable to each of the business

Advertising cost of 5 million should be allocated to each of the business as percentage of

contribution to Thus Unicycle business contributes 88 .24 to business contributes

11 .76 to to unicycle business

and the remainder should be allocated to bicycle business

Cost of advertising for unicycle business 4 .412 million

Cost of advertising for bicycle business 0 .588 million

Warehousing cost should be allocated as percentage of warehousing space used by each of

the business . Unicycle business uses 75 of the whereas bicycle

business uses 25 of the million warehousing

cost unicycles business should be allocated 75 of the warehousing cost amounting to 2 .25 million similarly the bicycle business must be allocated the remaining 0 .75 million

Issues related to allocation of cost

Cost allocation is used to determine the product price . Allocation of too much cost will lead

to increased sale price thereby affecting the competitiveness of the product , on the other hand

allocation of very few cost may result in very low pricing , consequently resulting financial

loss

In the traditional method of cost allocation Unicycle business was allocated very little cost

resulting in low...