2.34 Advanced, cost classification. - 1606

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2.34 Advanced

 

(i)            Costs may be classified in a number of ways including classification by behaviour, by function, by expense type, by controllability and by relevance.

 

(ii)           Management accounting should assist in EACH of the planning, control and decision making process in an organization.

 

Discuss the ways in which relationships between statements (i) and (ii) are relevant in the design of an effective management accounting system.

 

 

 

Solution Description

Cost can be classified by:

·         Behaviour – By classifying costs into fixed, variable, semi-fixed and semi-variable categories the outcomes from different activity levels can be examined.

·         Function – Functions are the different responsibility centres within the organization. The budget in built up by the functional levels so that everyone on the organization has a clear understanding of the role that their responsibility centre has in achieving the annual budget.