Effect of Different Classes of Cost in Decision Making

‘‘Effect of Different Classes of Cost in
Decision Making
Course Title: Cost and
Chowdhury Tabassum Shakila
Department of Business Administration
LEADING UNIVERSITY, SYLHET
Name
Syed Ali Hasan
Abu Ahmed Shahib
Abdul
Ehsan Ahmed Chowdhury
Mahmudul Karim Newaz
Masum Hussain
Section
Submission date: 21Submission date: 21Submission date: 21Submission date: 21
An Assignment
On
Effect of Different Classes of Cost in
Decision Making”
Course Title: Cost and Management Accounting
Course Code: ACC - 340
SUBMITTED TO
Chowdhury Tabassum Shakila
Lecturer (Accounting)
SUBMITTED BY
Torch Bearer’s
Name ID
Syed Ali Hasan 1201010248
Abu Ahmed Shahib 1201010247
Abdul Motin 1201010219
Ehsan Ahmed Chowdhury 1201010230
Mahmudul Karim Newaz 1201010205
Masum Hussain 1201010202
Section: E Semester: 8th
Batch: 30th
Submission date: 21Submission date: 21Submission date: 21Submission date: 21stststst July, 2014July, 2014July, 2014July, 2014
Effect of Different Classes of Cost in
Management Accounting

Acknowledgement
At first, we are grateful to Almighty Allah for creating us in such a beautiful
country like Bangladesh and also for controlling our life. For the mercy of him,
we got such courage to start this assignment on ‘‘Effect of Different Classes of Cost
in Decision Making”
After that we want to give thanks to our honorable Head of the Department Dr.
Bashir Ahmed Bhuyian for giving us the opportunity to study in this subject.
We would like to express our thanks to the Librarian of Leading University for
all of his help that we have received.
Our respected parents who gave us mental support and inspiration for our
assignment, there is a special thanks for them.
We also want to give a lot of thanks to our honourable course teacher,
Chowdhury Tabassum Shakila for giving us mental support and a clear concept
about this assignment.
Without the help of our friends and classmates it was quite impossible to
prepare such kind of assignment. They gave us some necessary information
about this topic which was unknown to us. So, we would like to give thanks to
all of them.

Abstract
Running any business requires immense responsibility. In a company,
managers need to know the logistics of every department, from the cost of a box of
paper clips to the biggest deal made, in order to run it successfully. Managers who
aren’t very involved with their company’s finances don’t usually do well. The
ultimate goal is to make a profit by eliminating unnecessary costs. In order to make an
analysis of this, cost accounting comes into play.
Though cost accounting and management accounting are separate entity but
both of them are interrelated to each other. Management accounting is a broad concept
than the cost accounting because a manager must have to depend on cost accounting
for taking his managerial decision. Cost accounting it is a system that has been
developed to provide managers with a structure to examine the day-to-day finances of
the company, while not having tax factors to worry about. From the information
gathered, managers can make decisions on where to cut costs to improve the
company’s profitability. Cost accounting doesn’t follow any specific standards, such
as the GAAP (Generally Accepted Accounting Principles), as it is not used for
external purposes. A cost accounting system to help managers keep control over the
daily finances and be closely involved in almost every aspect of the business.
Management uses cost accounting, a subset of management accounting, for planning
and controlling operations and for decision making. The guiding light for cost
accountants is usefulness. The cost data must be accumulated, classified, interpreted,
and presented in ways that are useful to managers for decision making. A budget, the
key to planning and controlling, involves cost accounting data. Where to set an
optimal price for a product or service cannot be decided without knowing the cost of
what is to be sold.

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Introduction……………………………………………………..
Objective of the Study………………………………………...
Limitation of the study ………………………………………..
Literature Review…………
i. Discuss about Cost……………………………………..
ii. Different Types of Cost…………………………………
iii. Application of Cost……………………………………..
iv. Advantages of Cost…………………………………….
v. Criticism against Cost…………………………………..
vi. Limitation of Cost System……………………………...
Importance of the Study………………………………………
Group Evaluation ……………………………………………..
Conclusion……………………………………………………
References…………………………………………………….

Introduction
To reach its goal a present-day business has to sail through a variety of odds. Social
and economic environments are quickly changing all over the world especially in the
developing countries due to frequent change in political outlook and switchover to
globalization of economy. A business has to stand firmly on its foot and accept challenge to
face global competition. Protection to industries due to their infancy is unacceptable in the
present day.
Any business has to secure the shareholders fund and generate reasonable return every
year. It has to discharge its social responsibility and look after the human factors engaged in
the business. Changes in governmental outlook creating impact upon the business require
proper adjustment in the management of the business. To keep the most sensitive factor, cool
and properly motivated, any kind of confrontation with the labor organizations should be
tactfully avoided and at the same time, the labor and their organizations shall have to be
convinced that there is nothing to hide from them.
Thus, the present-day management of business grown in size and complexity cannot
be compared with the management of earlier business having no keen competition, no
necessity of adjustment due to changes in social, economic and political outlook.
Globalization of economy has put extra responsibility on the present-day business which the
earlier business had not to bear.
The owner of a business in earlier times could maintain personal contact with the
business and gather all information relating to the business whenever necessary due to the
facts that the business was small in size, no keen competition existed and the business
environment was free from complexity. This situation does not prevail in the present times.
So detailed information relating to the business collected through mechanism established,
appropriate management policy on the basis or the detailed information and proper execution
of such policies can only lead the business to success.
In modern treatment of sick persons various pathological and other information are to
be gathered before prescribing medicine. Exactly in the same manner, modern management
of business requires to gather various information regarding the business before making any
policy decision.

Objective of the study:
Primary objective
The first and most important objective of the assignment is to gather knowledge about cost its
classification and effect of different classes of cost in decision making. Moreover we will
know deeply about the implementation of Cost, Cost Application, Advantages and Limitation
for Appling Cost in an Organization.
Secondary objective
1. Help students to acquire knowledge and skills needed to carry out their rights
and responsibilities.
2. To help students for increasing their thinking skills and decision making
process.
3. Gather information and ideas.
4. Apply questions to decision-making situations.
5. Increasing the vocabulary of students.
6. To identify the causes responsible for increasing the cost of a firm.
7. Help students to use skills in finding, comprehending, organizing, and
communicating.
Limitation of the study:
i. Time Limitation: As our submission date of assignment is 22th
July we can’t
get enough time to collect necessary data for enriching the assignment.
ii. Budgetary Limitation: we are living in developing country & we are also
student that’s why we don’t have sufficient money to spend for betterment of
the assignment.
iii. Internet Limitation: In our country the internet service is too slow that’s why
we can’t access to internet so easily and find the necessary information
regarding the assignment.
iv. Shortage of necessary books: There is shortage of sufficient books in our
campus library about this topic.

Literature Review
Costs:
Costs are the necessary expenditures that must be made in order to run a business.
Every factor of production has an associated cost. The cost of labor, for example, used in the
production of goods and services is measured in terms of wages and benefits. The cost of a
fixed asset used in production is measured in terms of depreciation. The cost of capital used
to purchase fixed assets is measured in terms of the interest expense associated with raising
the capital.
Cost accounting
Is a process of collecting, analyzing, summarizing and evaluating various alternative
courses of action? Its goal is to advise the management on the most appropriate course of
action based on the cost efficiency and capability. Cost accounting provides the detailed cost
information that management needs to control current operations and plan for the future.
Businesses are vitally interested in measuring their costs. Many types of costs are
observable and easily quantifiable. In such cases there is a direct relationship between cost of
input and quantity of output. Other types of costs must be estimated or allocated. That is, the
relationship between costs of input and units of output may not be directly observable or
quantifiable. In the delivery of professional services, for example, the quality of the output is
usually more significant than the quantity, and output cannot simply be measured in terms of
the number of patients treated or students taught. In such instances where qualitative factors
play an important role in measuring output, there is no direct relationship between costs
incurred and output achieved.
Different ways to categorize costs
Costs can have different relationships to output. Costs also are used in different
business applications, such as financial accounting, cost accounting, budgeting, capital
budgeting, and valuation. Consequently, there are different ways of categorizing costs
according to their relationship to output as well as according to the context in which they are
used. Following this summary of the different types of costs are some examples of how costs
are used in different business applications ---

Fixed and Variable Costs
The two basic types of costs incurred by businesses are fixed and variable. Fixed costs
do not vary with output, while variable costs do. Fixed costs are sometimes called overhead
costs. They are incurred whether a firm manufactures 100 widgets or 1,000 widgets. In
preparing a budget, fixed costs may include rent, depreciation, and supervisors' salaries.
Manufacturing overhead may include such items as property taxes and insurance. These fixed
costs remain constant in spite of changes in output.
Variable costs, on the other hand, fluctuate in direct proportion to changes in output.
In a production facility, labor and material costs are usually variable costs that increase as the
volume of production increases. It takes more labor and material to produce more output, so
the cost of labor and material varies in direct proportion to the volume of output.
For many companies in the service sector, the traditional division of costs into fixed
and variable does not work. Typically, variable costs have been defined primarily as "labor
and materials." However, in a service industry labor is usually salaried by contract or by
managerial policy and thus does not fluctuate with production. It is, therefore, a fixed and not
a variable cost for these companies. There is no hard and firm rule about what category (fixed
or variable) is appropriate for particular costs. The cost of office paper in one company, for
example, may be an overhead or fixed cost since the paper is used in the administrative
offices for administrative tasks. For another company, that same office paper may well be a
variable cost because the business produces printing as a service to other businesses, like
Kinkos, for example. Each business must determine based on its own uses whether an
expense is a fixed or variable cost to the business.
In addition to variable and fixed costs, some costs are considered mixed. That is, they
contain elements of fixed and variable costs. In some cases the cost of supervision and
inspection are considered mixed costs.
Direct and Indirect Costs
Direct costs are similar to variable costs. They can be directly attributed to the
production of output. The system of valuing inventories called direct costing is also known as
variable costing. Under this accounting system only those costs that vary directly with the
volume of production are charged to products as they are manufactured. The value of
inventory is the sum of direct material, direct labor, and all variable manufacturing costs.

Indirect costs, on the other hand, are similar to fixed costs. They are not directly
related to the volume of output. Indirect costs in a manufacturing plant may include
supervisors' salaries, indirect labor, factory supplies used, taxes, utilities, depreciation on
building and equipment, factory rent, tools expense, and patent expense. These indirect costs
are sometimes referred to as manufacturing overhead. Under the accounting system known as
full costing or absorption costing, all of the indirect costs in manufacturing overhead as well
as direct costs are included in determining the cost of inventory. They are considered part of
the cost of the products being manufactured.
Product and Period Costs
The concepts of product and period costs are similar to direct and indirect costs.
Product costs are those that the firm's accounting system associates directly with output and
that are used to value inventory. Period costs are charged as expenses to the current period.
Under direct costing, period costs are not viewed as costs of the products being
manufactured, so they are not associated with valuing inventories.
If the firm uses a full cost accounting system, however, then all manufacturing
costs—including fixed manufacturing overhead costs and variable costs— become product
costs. They are considered part of the cost of manufacturing and are charged against
inventory.
Other Types of Costs
These are the basic types of costs as they are used in different accounting systems.
Controllable and Uncontrollable Costs—
In budgeting it is useful to identify controllable and uncontrollable costs. This simply
means that managers with budgetary responsibility should not be held accountable for costs
they cannot control.
Out-of-pocket and Sunk Costs—
Financial managers often use the concepts of out-of-pocket costs and sunk costs when
evaluating the financial merits of specific proposals. Out-of-pocket costs are those that
require the use of current resources, usually cash. Sunk costs have already been incurred. In
evaluating whether or not to increase production, for example, financial managers may take
into account the sunk costs associated with tools and machinery as well as the out-of-pocket
costs associated with adding more material and labor.

Marginal Costing:
Marginal costing is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of production, e.g., materials,
labor, direct expenses and variable overheads. Fixed overheads are excluded in cases where
production varies because it may give misleading results. The technique is useful in
manufacturing industries with varying levels of output.
Differential cost:
When a charge is made in the level of output or in product-mix the resulting increase
in total cost is called differential cost. It is important to ascertain differential cost in order to
judge the desirability of effect the change from the point of view of cost, revenue and profit.
Uniform Costing:
A technique where standardized principles and methods of cost accounting are
employed by a number of different companies and firms is termed as uniform costing.
Standardization may extend to the methods of costing, accounting classification including
codes, methods of defining costs and charging depreciation, methods of allocating or
apportioning overheads to cost centers or cost units. The system, thus, facilitates inter- firm
comparisons, establishment of realistic pricing policies, etc. Systems of Costing It have
already been stated that there are two main methods used to determine costs. These are: ·
• Job cost method
• Process cost method
It is possible to ascertain the costs under each of the above methods by two different ways:
• Historical costing
• Standard costing
Historical Costing:
Costs which are ascertained after they have been incurred are historical costs. It may
be found to be similar to diagnosing a disease by postmortem analysis. This is the traditional
costing. So far as cost control is concerned, it doesn’t bear much value.
Historical costing can be of the following two types in nature:
• Post costing
• Continuous costing
Post Costing:

Post costing means ascertainment of cost after the production is completed. This is
done by analyzing the financial accounts at the end of a period in such a way so as to disclose
the cost of the units which have been produced.
For instance, if the cost of product A is to be calculated on this basis, one will have to wait till
the materials are actually purchased and used, labor actually paid and overhead expenditure
actually incurred. This system is used only for ascertaining the costs but not useful for
exercising any control over costs, as one comes to know of things after they had taken place.
It can serve as guidance for future production only when conditions in future continue to be
the same.
Continuous Costing:
In case of this method, cost is ascertained as soon as a job is completed or even when
a job is in progress. This is done usually before a job is over or product is made. In the
process, actual expenditure on materials and wages and share of overheads are also estimated.
Hence, the figure of cost ascertained in this case is not exact. But it has an advantage of
providing cost information to the management promptly, thereby enabling it to take necessary
corrective action on time. However, it neither provides any standard for judging current
efficiency nor does it disclose what the cost of a job ought to have been.
Standard Costing:
Standard costing is a system under which the cost of a product is determined in
advance on certain pre- determined standards. With reference to the example given in post
costing, the cost of product A can be calculated in advance if one is in a position to estimate
in advance the material labor and overheads that should be incurred over the product. All this
requires an efficient system of cost accounting. However, this system will not be useful if a
vigorous system of controlling costs and standard costs are not in force. Standard costing is
becoming more and more popular nowadays.
Incremental and Opportunity Costs—
Financial planning efforts utilize the concepts of incremental and opportunity costs.
Incremental costs are those associated with switching from one level of activity or course of
action to another. Incremental costs represent the difference between two alternatives.
Opportunity costs represent the sacrifice that is made when the means of production are used
for one task rather than another, or when capital is used for one investment rather than
another. Nothing can be produced or invested without incurring an opportunity cost. By
making one investment or production decision using limited resources, one necessarily

forgoes the opportunity to use those resources for a different purpose. Consequently,
opportunity costs are not usually factored into investment and production decisions involving
resource allocation.
Imputed Costs—
Also of use to financial planners are imputed costs. These are costs that are not
actually incurred, but are associated with internal transactions. When work in process is
transferred from one department to another within an organization, a method of transfer
pricing may be needed for budgetary reasons. Although there is no actual purchase or sale of
goods and materials, the receiving department may be charged with imputed costs for the
work it has received. When a company rents itself a building that it could have rented to an
outside party, the rent may be considered an imputed cost.
Applications of different types of costs
Costs as a business concept are useful in measuring performance and determining
profitability. What follows are brief discussions of some business applications in which costs
play an important role.
Financial Accounting
One of the major objectives of financial accounting is to determine the periodic
income of the business. In manufacturing firms a major component of the income statement
is the cost of goods sold (COGS). COGS is that part of the cost of inventory that can be
considered an expense of the period because the goods were sold. It appears as an expense on
the firm's periodic income statement. COGS is calculated as beginning inventory plus net
purchases minus ending inventory.
Financial accounting consists of recording, classifying and analyzing the business
transactions so as to facilitate the preparation of profit and loss account for a period and also
the position statement as on particular date. Thus, the emphasis of financial accounting is on
the ascertainment of profit or loss of the concern and not on the more important aspects of the
business i.e.. Planning, control and decision-making. Cost accounting analyses the
transactions in an objective manner for the purpose of planning, control and decision making.
Depreciation is another cost that becomes a periodic expense on the income
statement. Every asset is initially valued at its cost. Accountants charge the cost of the asset
to depreciation expense over the useful life of the asset. This cost allocation approach

attempts to match costs with revenues and is more reliable than attempting to periodically
determine the fair market value of the asset.
In financial accounting, costs represent assets rather than expenses. Costs only
become expenses when they are charged against current income. Costs may be allocated as
expenses against income over time, as in the case of depreciation, or they may be charged as
expenses when revenues are generated, as in the case of COGS.
Cost Accounting
Cost accounting, also sometimes known as management accounting, provides
appropriate cost information for budgeting systems and management decision making. Using
the principles of general accounting, cost accounting records and determines costs associated
with various functions of the business. These data are used by management to improve
operations and make them more efficient, economical, and profitable.
Two major systems can be used to record the costs of manufactured products. They
are known as job costing and process costing. A job cost system, or job order cost system,
collects costs for each physically identifiable job or batch of work as it moves through the
manufacturing facility and disregards the accounting period in which the work is done. With
a process cost system, on the other hand, costs are collected for all of the products worked on
during a specific accounting period. Unit costs are then determined by dividing the total costs
by the number of units worked on during the period. Process cost systems are most
appropriate for continuous operations, when like products are produced, or when several
departments cooperate and participate in one or more operations. Job costing, on the other
hand, is used when labor is a chief element of cost, when diversified lines or unlike products
are manufactured, or when products are built to customer specifications.
When costs are easily observable and quantifiable, cost standards are usually
developed. Also known as engineered standards, they are developed for each physical input
at each step of the production process. At that point an engineered cost per unit of production
can be determined. By documenting variable costs and fairly allocating fixed costs to
different departments, a cost accounting system can provide management with the
accountability and cost controls it needs to improve operations.
Budgeting Systems
Budgeting systems rely on accurate cost accounting systems. Using cost data
collected by the business's cost accounting system, budgets can be developed for each

department at different levels of output. Different units within the business can be designated
cost centers, profit centers, or departments. Budgets are then used as a management tool to
measure performance, among other things. Performance is measured by the extent to which
actual figures deviate from budgeted amounts. In using budgets as measures of performance,
it is important to distinguish between controllable and uncontrollable costs. Managers should
not be held accountable for costs they cannot control.
In the short run, fixed costs can rarely be controlled. Consequently, a typical budget
statement will show sales revenue as forecast and the variable costs associated with that level
of production. The difference between sales revenue and variable costs is the contribution
margin. Fixed costs are then deducted from the contribution margin to obtain a figure for
operating income. Managers and departments are then evaluated on the basis of costs and
those elements of production they are expected to control.
Cost of Capital
Capital budgeting and other business decisions—such as lease-buy decisions, bond
refunding and working capital policies—require estimates of a company's cost of capital.
Capital budgeting decisions revolve around deciding whether or not to purchase a particular
capital asset. Such decisions are based on a cost-benefit analysis, an estimate of the net
present value of future revenues that would be generated by a particular capital asset. An
important factor in such decisions is the company's cost of capital.
Cost of capital is a percentage that represents the interest rate the company would pay
for the funds being raised. Each capital component—debt, equity, and retained earnings—has
its own cost. Each type of debt or equity also has a different cost. While a particular purchase
or project may be funded by only one kind of capital, companies are likely to use a weighted
average cost of capital when making financial decisions. Such practice takes into account the
fact that the company is an ongoing concern that will need to raise capital at different rates in
the future as well as at the present rate.
Other Applications
Costs are sometimes used in the valuation of assets that are being bought or sold.
Buyers and sellers may agree that the value of an asset can be determined by estimating the
costs associated with building or creating an asset that could perform similar functions and
provide similar benefits as the existing asset. Using the cost approach to value an asset

contrasts with the income approach, which attempts to identify the present value of the
revenues the asset is expected to generate.
Finally, costs are used in making pricing decisions. Manufacturing firms refer to the
ratio between prices and costs as their markup, which represents the difference between the
selling price and the direct cost of the goods being sold. For retailers and wholesalers, the
gross margin is the difference between their invoice cost and their selling price. While costs
form the basis for pricing decisions, they are only a starting point, with market conditions and
other factors usually determining the most profitable price.
Advantages of Cost Accounting
Let us now examine the advantages that are derived from cost accounting. The nature
and extent of the advantages that may be expected from a costing system depends upon the
type, adequacy and efficiency of costing system installed and also upon the preparedness of
management, at all levels, to accept and act upon the advices given by the costing system.
The following are the principal advantages of a well installed and well accepted costing
system:-
(a) Elimination of wastes, losses, inefficiencies: Idle time, lost time, idle facilities,
wastage of materials in the form of spoilage, excessive scarps etc. Can be eliminated
by employing a good costing system.
(b) Cost reduction: By operational research new and improved methods of production
are invented by a good costing system so as to reduce cost.
(c) Detection of reasons for profit or loss: A costing system finds out the actual reasons
for reduction in profit or increase in profit. It identifies the production that runs at a
loss and suggests to the management the way of its improvement or possibility of
shutting it down.
(d) Advices on various matters: Cost accountant, on the basis of cost information, can
advise the management in such a way the management can rightly choose the best out
of many alternatives. Management, without appropriate advice from the cost
accountant, cannot decide whether to buy or make, whether to accept orders below
cost or not.
(e) Fixation of price: Cost accounting helps the management to fix price and to prepare
estimates for submission of tenders etc.

(f) Cost control: Cost accounting, by fixing standards and budgets and comparing the
actual with standards or budgeted figures and finally analyzing the variances, points
out to the management the weak and strong points so that the management can
exercise control.
(g) Assisting the Government, Trade unions etc. : The government uses cost
information for maximum price fixation, price control, tariff protection, minimum
wage fixation etc. Trade unions also use cost information for solving trade disputes
etc.
(h) Marginal analysis of cost: It is done for facilitating short-term decisions, particularly
in times of trade depression.
(i) Fixation of responsibility: For appropriate cost accounting cost centers and
responsibility centers are determined. When responsibilities are properly defined and
fixed on individuals, it becomes difficult to evade responsibility of performance and
as a result, overall efficiency improves.
(j) Helping preparation of final accounts under financial accounting system: Cost
accounts readily supplies the figures for closing materials, work-in-progress and
financial goods. So final accounts can be prepared without any delay for ascertaining
such values.
(k) Prevention of Frauds etc. Thereby helping the management, the Government and
others connected with the organization: By introducing cost audit, frauds can be
prevented; correct and reliable data can be obtained, not only by the management but
also by the Government, the shareholders, the creditors etc.
Criticisms against Cost Accounting
The following points of criticism are sometimes leveled against the costing system:
1. Heavy amount of expense is involved in installing a costing system. It is often argued
that costs involved in installing the system will enhance cost of production, but it
actually reduces cost of production through cost control.
2. Costing system meant for the organization may not suit the organization at all. If the
nature of the business is studied and a costing system suitable for the business is
installed, this criticism does not stand. costing system is to suit the business and not
vice versa.

3. Employees often resist installation of a costing system. This is due to ignorance on
the part of the employees and their suspicion. If employees are properly educated so
that they are in a position to understand the benefits that accrue to them, no such
resistance shall be forthcoming.
4. Instances of failure in many cases are often cited. Failure of a costing system may be
due to defective procedure or due to rejection of the advice of the cost accountant by
the management or due to both.
5. When the old industries prospered without the help of a costing system why the
modern industries should require? Old industries did not have to face keen
competition as the modern industries have to face now. So a costing system is
essential now, just to keep the cost within control, in order to enable the industry to
stand competition.
6. Monotonous work of costing system is another criticism. Where is the absence of
monotony? Is it not present event in daily life? In a costing system, “only forms and
statements are to be prepared” – this is a statement made by many criticisms.
Limitations of Costing System
The real limitations of costing system may be summarized as below:
1. Cost statistics relate to past performances, whereas all decisions are to be taken
about the future.
2. The cost of previous year may not continue to be the same in the current or future
year due to price variations.
3. The cost ascertained on the basis of full utilization of capacity may not be true
when utilization is only partial, for any reason.
4. Non-inclusion of some cost (notional in nature) may reduce cost. Different
methods used in pricing the materials and in absorption of overheads may result in
different costs.
5. Management may believe that, detailed records may give benefit, but they are
costly too.
6. Various management problems may be solve d by value analysis, work study,
time and motion study, operation research and other cost reduction techniques.
Cost accounting fails to tackle such problems.
7. To maintain all records for control, under a costing system, is also very expensive.

8. Delay in receiving costing information does not help the management to take
decision at the right moment.
9. Rigid costing does not serve all purposes.
Importance of the Study:
In management accounting, cost accounting establishes budget and actual cost of
operations, processes, departments or product and the analysis of variances, profitability or
social use of funds. Managers use cost accounting to support decision-making to cut a
company's costs and improve profitability. As a form of management accounting, cost
accounting need not to follow standards such as GAAP, because its primary use is for internal
managers, rather than outside users, and what to compute is instead decided pragmatically.
Costs are measured in units of nominal currency by convention. Cost accounting can
be viewed as translating the supply chain (the series of events in the production process that,
in concert, result in a product) into financial values.
Group Evaluation
All types of businesses, whether service, manufacturing or trading, require cost
accounting to track their activities. Cost accounting has long been used to help managers
understand the costs of running a business. Modern cost accounting originated during
the industrial revolution, when the complexities of running a large scale business led to the
development of systems for recording and tracking costs to help business owners and
managers make decisions.
In the early industrial age, most of the costs incurred by a business were what modern
accountants call "variable costs" because they varied directly with the amount of
production. Money was spent on labor, raw materials, power to run a factory, etc. in direct
proportion to production. Managers could simply total the variable costs for a product and
use this as a rough guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike variable costs,
which rise and fall with volume of work. Over time, these "fixed costs" have become more
important to managers. Examples of fixed costs include the depreciation of plant and
equipment, and the cost of departments such as maintenance, tooling, production control,
purchasing, quality control, storage and handling, plant supervision and engineering. In the

early nineteenth century, these costs were of little importance to most businesses. However,
with the growth of railroads, steel and large scale manufacturing, by the late nineteenth
century these costs were often more important than the variable cost of a product, and
allocating them to a broad range of products lead to bad decision making. Managers must
understand fixed costs in order to make decisions about products and pricing.
For example: A company produced railway coaches and had only one product. To
make each coach, the company needed to purchase $60 of raw materials and components, and
pay 6 laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing
that making a coach required spending $300, managers knew they couldn't sell below that
price without losing money on each coach. Any price above $300 became a contribution to
the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent,
insurance and owner's salary, the company could therefore sell 5 coaches per month for a
total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each),
and make a profit of $500 in both cases.

Conclusion:
In this work we have analyzed the preprocessing performance in the framework of
imbalanced datasets against other approaches in this problem such as cost-sensitive learning.
We have observed that the approaches used to address the imbalanced problem improve the
overall performance in all the paradigms used in the study, which was the expected
behaviour. The comparison between preprocessing techniques against cost-sensitive learning
hints that there are no differences among the different preprocessing techniques. The
statistical study carried out let us say that both preprocessing and cost-sensitive learning are
good and equivalent approaches to address the imbalance problem.
Finally, we develop a discussion about how to go above preprocessing and cost-sensitive
learning limits. We try to analyze the problem according to the results and we focus on the
problems of costing from different point of view. Specifically, we have emphasized on the
techniques of costing moreover other issues like the class overlapping and dataset shift
problems that arise in some cases and can prove detrimental in terms of classification
performance. Since overcoming these problems is the key to the improvement of the
organizational efficiency, the management body should be more conscious regarding this.
Cost information is part of the basic information needed by managers and policy makers for
making decisions about how to improve the performance of an organization and where to
allocate the resources within or among organization. Cost data are not always available from
routine data systems, due to poor information systems and lack of resources devoted to
organization management. Without quality cost data it is not possible to make accurate
projections, improve technical efficiency, control expenditure and enhance accountability of
managers. A scientific costing system is a very important tool for managements to fulfill
these needs and hence, is imperative for the successful running of an organization

References:
1. Theory and Practice of Costing, Basu & Das, Volume One, 2009 Edition.
2. http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=9623a
3. http://ocw.mit.edu/courses/sloan-school-of-management/15-501-introduction
to-financial-and-managerial-accounting-spring-2004/lecture notes/lec19cost_acc
4. http://www.quickbooks.co.za/product/accounting-software/cost-accounting-importance/
5. http://bookboon.com/en/managerial-and-cost-accounting-ebook

Effect of Different Classes of Cost in Decision Making

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