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Running head: MANAGEMENT ACCOUNTING 1

Management Accounting

Name

Institutional Affiliation

MANAGEMENT ACCOUNTING 2

Management Accounting

Flower business is among the robust enterprises to operate. It is a business which

comprises of higher levels of competition as well as the perishability of the products. Owing

to the Nature of the market that the Flower Finesse Company operates in, it is crucial to

determine the various cost classification they can utilize to ensure profitability. Cost from a

business perspective refers to the resources forgone to achieve the organization’s goal. Cost

classification ensures success in the decision making involving costs and costing in any firm.

Factors which determine the type of cost classification a firm can adopt include the nature of

expenses, traceability and the activities the firm is involved in. Other factors determining cost

classification is the timing of charge against revenue, the management function and the

relevance to decision making.

Management function

Management decision making concerning costs and costing, cost classification is done

based on the cost incurred during processing of the products. Manufacturing cost is the cost

incurred by the firm during the process of conversion of the raw materials to a final product.

The cost of classification includes the raw material costs, the cost of labour and the factory

overhead.

The management function in the cost classification also includes non-manufacturing

costs. This type of cost is the opposite of the manufacturing costs. It incorporates the cost

incurred by the firm but not in the process of converting the raw materials to finished

products. It includes the selling expenses like advertising costs, delivery expenses,

commissions for the salesmen and the salaries of the firms’ employees (Mance et al., 2015).

Traceability

Cost classification for the flower finesse company could also be as direct costs and

indirect costs. Direct costs include those costs which can be directly traced to specific objects

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of costing. They include expenses incurred by a certain department within the firm; it may

also include the material and direct labour costs.

Behaviour

Cost classification could also be according to the behaviour depending on the firm’s

activity. The various cost classification according to behaviour includes variable costs, fixed

costs, and mixed costs. The variable cost changes due to the changes in the firm’s activity.

Example of variable costs include the direct materials, direct labour and the sales

commissions based on the product sales.

Another classification is the fixed costs. They are those costs which remain constant

even if the firm’s activities change. They include the cost spent on rent of the premises,

insurance cost, and the depreciation using the straight-line method.

Lastly is the mixed cost. It refers to those costs, which change in total but not based on

the firm’s activities (Bouwens, 2017). The Mixed cost is the combination of the fixed cost

potion and the variable costs.

Relevance to decision making

Cost classification is also dependent on decision making by the firm’s management.

They include the relevant cost, the standard cost, opportunity cost, sunk cost and the

controllable costs. In this category, the relevant cost refers to those costs which directly

affects the decision making. The standard cost is the predetermined costs based on the

experience, budgeted amounts, Industry standards et cetera. It acts as the tool of measurement

whereby the actual cost of the company is compared to the standard cost. There is also

opportunity cost which refers to the benefits forgone at the expense of the other. Sunk cost,

on the other hand, refers to the costs which may not have the impact on the decision making

or an issue at hand. Finally, is the controllable cost which the manager of the firm has direct

MANAGEMENT ACCOUNTING 4

influence as well as control over. Therefore, the superiority of a department manager is based

on the value of the controllable cost they control.

The activity of the costing process includes three parts the input, polishing stage and the

output. The input stage comprises of the activities which lead to costs incurred during the

production. Such costs include supplies, equipment, rent, and electricity. The second stage is

the polishing stage which is the costs incurred in transforming the raw materials to the final

product. They are also the costs from the activities incurred by the performance of the

system. Such activities include loading machine, operating machine, packaging et cetera.

The final stage is the output stage, which includes the activities of the output of the costing

system (Drury, 2013). An example is the product cost.

The specific costing technique that would work for the Flower Finesse Co is the

processing cost technique. It is the process of collecting and assigning the manufacturing

costs to the units the firms produce. The flower Finesse Co requires several processing

operations to come up with their final product which is the flower for importation. The

processing operations begin with the cost department concerned with the direct materials.

The flowers are then groomed and when ready for importation they are packaged for

exportation. The grooming stage is the conversion cost, and it involves the direct labour and

manufacturing overhead incurred by the company (Horngren, 2009). There are several types

of process costing. They include the weighted average cost, the standard cost and the first in

first out (FIFO) costing. The weighted average costs involve the accumulation of all the costs

whether from the current production or the previous periods and the costs are then lumped

together and assigned to a produced unit. The standard costs are assigned to be used in

measuring the actual cost of production. The difference between the standard cost and the

actual cost is then charged to a variance account. The FIFO costing is a bit complex since it

creates layers of costs for any unit of production which was created in the previous

MANAGEMENT ACCOUNTING 5

production period. In the process costing there is no Last in First out technique due to the

perishability of the goods produced. Also, the underlying assumption of the process costing

does not allow the LIFO concept instead it encourages the FIFO concept.

There are various methods of cost calculation, especially for the processing cost.

However, the preferred cost calculation method depends on the different accounting needs.

The Weighted average method, for instance, is preferred in situations where there is no

standard costing system or even in situations where the fluctuations in costs are so minimal

such that the management does not see any need in for costing accuracy which can also be

obtained with the use of the FIFO costing technique (Lanen, 2016).

Cost flow

In processing cost, cost flows are direct in that the direct material costs are

supplemented at the commencement of the process. Then the other costs such as the direct

labour and the overhead are added gradually over the course of the production process. In the

case of the Flower Finesse Co, the costs incurred in acquiring the flower seeds are added at

the beginning of the operation and then the other costs such as labour and are added gradually

as the process continues.

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References

Bouwens, J. (2017). Understanding investment decisions: the role of cost accounting.

Drury, C. M. (2013). Management and cost accounting. Springer.

Horngren, C. T. (2009). Cost accounting: A managerial emphasis, 13/e. Pearson Education

India.

Lanen, W. (2016). Fundamentals of cost accounting. McGraw-Hill Higher Education.

Mance, D., Vretenar, N., & Katunar, J. (2015). Opportunity Cost Classification of Goods and

Markets.

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