How cost assists management in decision making Essay

A Public Limited Company which is listed at the London Stock Exchange needs to write off to run the assorted types of activity within the company for bring forthing merchandise or providing service. In that instance it is really of import to cognize about the cost which will help direction in the determination devising procedure.

Outcome 1:


Cost is an disbursal to run the concern for the company. A Company serves merchandises or services to run the concern and that ‘s why concern involved to write off costs to bring forth merchandises or services. The types of cost could be as undermentioned Figure 1:

Direct Cost:

Harmonizing to the Brammer and Penning ( 2001 ) “ Costss that are straight attributable to the units of end product. They can be divided into direct stuffs, direct labor and direct disbursals. ” Direct cost related to the production of the company. It is specific and related to the cost unit every bit good. Direct costs have been shown by giving an illustration as undermentioned Figure 2:

To do Product X, Direct costs of the Company would be:

Particulars ( ? )

Direct Materials 10

Direct Labour 6

Direct Expenses 9

Prime cost = 25

The add-on of direct costs called as premier cost.

Indirect Cost:

It is non straight related to the production of the company. Indirect cost can besides be shared cost. Harmonizing to the Horngren et Al ( 2002 ) “ Indirect cost are costs that are related to the peculiar cost object but can non be traced to it in an economically executable ( cost-efficient ) manner. ” Indirect costs are allocated to the cost object utilizing a cost allotment method.

Indirect costs have been shown by giving an illustration as undermentioned Figure 3:

To do Product X, Indirect costs of the Company would be:

Particulars ( ? )

Indirect Materials 6

Indirect Labour 4

Indirect Expenses 5

Overheads = 15

The add-on of indirect costs called as Overhead.

The Behaviour of Costss:

Cost is involved to accomplish the concern aim of the company. Harmonizing to the Atrill, P and McLane, E ( 2008 ) “ The cost incurred by a concern may be classified in assorted ways and one of import manner is harmonizing to how they behave in relation to alter in the volume of activity. ” The type of cost behavior has been described as undermentioned Figure 4:

Variable Cost:

It is depends to the figure of production. If the figure of production is increase so the entire cost will be addition and if the figure of production is cut down so entire cost will besides be lessening but the per unit production cost will be the same. Figure 5 is demoing the variable cost:

Here, horizontal line shows that the entire figure of unit production and perpendicular line shows the entire cost of production. Here, when the entire 5 figure of unit produced so the entire cost of production is ? 10. So it shows that per unit cost is ?2. Again the entire figure of unit increased by 10 so the entire cost of production is ?20. Here is besides entire cost has increased but per unit cost has been remain same.

Example of Variable cost:

Variable cost can be natural stuffs, labours etc. The increase of this cost is depends on the production. When production is increase so the cost of natural stuffs, labor is addition and the same manner it is rearward when the production is lessening.

Fixed Cost:

Fixed cost is a cost which is non change harmonizing to the production. It ever remains changeless although the production of the company is addition or lessening. Figure 6 is demoing the fixed cost:

Here, horizontal line shows that the entire figure of unit production and perpendicular line shows the entire cost of production. It is demoing here, when 5 units has been produced so the fixed cost was ?10000 and when figure of production has been increased from 5 to 10 that clip besides fixed cost ?10000. That means the fixed cost is ne’er alteration and by the fluctuation of the production, fixed cost is non alteration.

Example of Fixed Cost:

The fixed cost of merchandises or services can be Building, depreciation, Rent & A ; rates, wages etc. This cost will non alter if the production is increase or lessening.

Semi variable Cost:

It is a assorted cost with variable and fixed cost. The amount of entire variable cost and fixed cost is semi variable cost. If the company does non bring forth something so besides cost will affect which is fixed cost. Figure 7 is demoing the semi variable cost:

Here, horizontal line shows that the entire figure of unit production and perpendicular line shows the entire cost of production. When the entire unit of production is 10000 so the entire cost of production is ?70000. Here fixed cost is demoing ?50000, so entire variable cost will be ( 70000- 50000 ) = ?20000. That means it can be state Fixed cost + Variable cost = Semi variable cost.

Example of Semi- variable cost:

Phone measure or public-service corporation measure can be semi- variable cost. To utilize the connexion, some specific sum have to pay for the service that is connexion fee which will stay same in every month and on depending of utilizations have to pay with the connexion fee which can be vary on the utilizations.

Stepped Cost:

It is a type of cost which will be fix for a certain period or scope. When the scope exceeded and goes up to following phase so the cost will be involve for the old scope plus new scope. Figure 7 is demoing the Stepped cost:

Here, horizontal line shows that the entire figure of unit production and perpendicular line shows the entire cost of production. In Stepped cost, company produce 20 unit which cost is ?40, if the production increased up to 35 so the cost will be addition ( Relevant Range A+B ) 40 +45 = 85. If once more the production is increased up to 40 so in that instance the cost will be ( Relevant Range A+B+C ) ? ( 40+45+50 ) = ?135.

Example of Stepped Cost:

Stepped cost can be H2O monetary value or gas monetary values which are natural resources and those are non abundant.

Outcome 2:

For any concern it is really of import to cut down cost and increase the value of concern. To keep the quality of concern and at the same clip to maintain the cut down cost, concern demand to analysis some assorted techniques and will happen out which technique are fit for the concern.

There are some techniques which have been demoing in Figure 8:

Entire Quality Management ( TQM ) :

This technique comes from Nipponese organisation TOYOTA which has been provided a important function in planetary concern success. To forestall the costs than the rectification of costs are the cardinal principal of Entire Quality Management.

Doctrine of TQM:

Harmonizing to the CIMA Text Book, “ The doctrine of TQM is based on the thought of a series of quality ironss which may be broken at any point by one individual or service non run intoing the demands of the client. The key to TQM is for everyone in the administration to hold chiseled clients – an extension of the word, beyond the clients of the company, to anyone to whom an person provides a service. ”

Purposes of TQM:

Analyzing the principal and the doctrine of TQM, it describes that to guarantee or command the quality of the merchandises and services first clip so that the cost can be cut down at the same clip increase the value of goods and services than the other rivals and can maintain high client satisfaction.

Cost of Quality:

It ‘s maintained the acceptable quality and prevent from the cost of hapless quality. It assures the high quality of the concern and besides assures there is no default anyplace in the concern.

TQM techniques work on four cost of quality which has been categorized below Figure 9:

Prevention Costss:

It is linked with the squad who are involved to forestall defects and other quality job. This squad prevent all defects of the qualities from happening in the first topographic point by commanding providers, merchandises and procedure betterments. So at the terminal organisation do non confront any quality troubles and they do n’t necessitate to use more clip and money to happen out defects. Example: Planning, readying and preparation are bar costs.

Appraisal Costss:

Before presenting goods, it is evaluate, look into default of goods and trial the quality. Example: Appraisal costs can be test of production, trials.

Internal Failure Costss:

Internal failure cost involve when any default found in an organisation. It is depends on appraisal activities. Examples: Internal failure cost can be alteration, re-test and re-design, overtime.

External Failure Costss:

This external failure costs arise after presenting goods and services to the clients. When the client is really non satisfied about merchandises or services so it is involved. It is involved lost hereafter concern. Example: This cost can be refund, guarantee, loss of client good will.

Balance Score Card ( BSC ) :

Balance Score Card ( BSC ) is another technique to cut down cost and better the value of the concern. The Balance Score Card technique was invented by Robert Kaplan and David Norton which has been published in 1996.

This technique measures the public presentation of finance, clients, concern procedure, invention and acquisition in the concern to increase the value of concern and cut down cost. It is a strategic attack which is work from four positions which has been demoing in Figure 10:

Above the four positions of Balance Score Card is inter-related to each other which has been analysed below:

Fiscal Position:

It measures the net income, return on capital employed ( ROCE ) , gaining per portion ( EPS ) and so travel towards to better the country where they are lacking.

Internal Position:

This position measures the internal procedure of concern. On the other manner it can picture, by this perspective direction informed about the internal procedure is running good or non and so can take safeguard stairss.

Innovation & A ; Learning Perspective:

It measures of employee ‘s preparation & A ; larning chance, about occupation satisfaction, per centum of expertness in the concern so that the quality of the merchandise or service can be better and cost is cut down.

External Position:

This position measures the client satisfaction, bringing public presentation, per centum of the client in the market, client keeping.

Value Analysis:

It is besides another technique apply to cut down the cost of the concern and increase the value.

This value analysis method analyse the value of each stairss in the administration to cut down cost and increase value.

This analysis based on four facets which has been depicts below Figure 11:

Cost Values:

It is depend on the cost of production and selling finished goods. This aspect tries to cut down unit cost and maintain bettering value of the merchandise.

Exchange Value:

This aspect measures the value of the merchandise in the market. On the other sense it can be define that the satisfaction of the client for the merchandise.

Use Value:

This aspect measures the public presentation of the merchandise which is related to the exchange value and respect value.

Esteem Value:

It measures the desire of the client for the merchandise.

Hence, after analysed above all assorted types of techniques to cut down costs and increase value within a concern more or less similar. Though more or less similar, administrations use any one of the technique harmonizing to their mission, vision, aims and construction of the organisation.

Outcome 3:

Budget is a future contemplation of the company aim, mission and end. Harmonizing to Lucey, T ( 1996 ) , “ A budget is a quantitative look of a program of action prepared in progress of the period to which it relates. ” Budget is prepared for to gauge the state of affairs of future activities in the company.

Aim of the budget:

By and large, from the above definition of budget it could presume that to success the mission and end of the company are the aim of the budget. In every measure, company demand to command and cognize how much cost is involved in peculiar production. By gauging budget, company cognize the cost and can carry through their end to command cost.

Budget commission and their function:

A squad within the company who are accountable for illustrate budget which meet all demands of the company, make certain they meet the footings and so give in to the caput of the company. The function of the commission is to show all the demands in the budget to derive the company end.

Types of Budget:

There are assorted types of budget and company can follow harmonizing to their construction. The types of budget are demoing in following Figure 12:

Incremental Budget:

Incremental budget is prepared by following old twelvemonth budget with addition or lessening sum added or erased for the new budget period. It is a traditional budget method which can be use in stable environment of company. This method is really easy to make budget and besides easy to understand. On the other manus it is really simple budget which does n’t utilize in the unstable environment of the company.

Example of incremental budget:

The following twelvemonth budget has added addition sum by following current twelvemonth budget.Zero Based Budgeting:

It is another method of budget which starts nothing at the beginning of the twelvemonth and warrant all of outgo. This budget is based on virtue. In this budget ‘value for money ‘ attack must be followed. ( Lucey, T 1996 ) .

It builds oppugning system to do the budget and that ‘s why it is easy to place which is non efficient or non cost effectual. For the inquiring system it can decently carried out the most cost effectual operation of the company and so the end of the company could be achieved. On the contrary it is a really drawn-out procedure and demand to make batch of paper work to do concluding determination. It can merely utilize in unstable environment of the concern.

Example of Zero based Budgeting:

To do a Zero based budget will hold to travel through some processs or degrees which has been discussed as followers:

Level one: First will hold to compose down all the beginnings of income and so all the list of disbursals.

Flat two: sort all disbursals types and to do allocate fixed and semi-fixed disbursals. And will hold to do apportion all variable disbursal so will hold to cipher the difference between income and outgo.

Finally: Adjust income and outgo.

Activity Based Budgeting:

This budget is more common with Zero based budgeting. It is prepare by mensurating each and every individual thing of the concern so that if the budget shaper or direction is non good so activity based budget will non be appropriate. This budget is called besides as value analysis budget. This budget is easy to understand and more effectible if it is made accurately. But this is besides drawn-out procedure to do budget which is waste of clip and in stable environment of the concern it can non utilize.

In a purchase section there are two chief activities, one is providers and another 1 is purchase orders. There 200 providers and 1000 purchase orders have been forecast based on the activity expected for the period. Here per unit cost for providers is ( 34000/200 ) = ?170 and per unit cost for purchase order is ( 35000/1000 ) = ?35.

Rolling Budget:

It is another method of budget which rolls in front every month. This budget can regularly amend for the state of affairs of the concern. This budget can utilize harmonizing to the fortunes of the concern. But this budget does n’t utilize in stable environment.

Here above, the budget for direct stuff and direct labor has been changed or turn overing in every month.

Behavioral Aspects in Budget Setting:

In the clip of budget puting different types of behavior affect to put a budget. Depending on the behavioral facet, budget might be or might non be successful. Behavioral facet of puting budget has been depicts in following


Budget is being prepare from the top degree direction and it implement to low degree. There is no engagement from the lower degree where it is being implemented. In that instance, it is really faster to puting a budget for the company that is clip oriented. But at that place might non be any contemplation of the present state of affairs which is confronting lower degree. Possibly budget trouble can be originating and besides it can be unsuccessful.


It comes from the lower degree where entire engagement of the administration is being involved. By sharing different perceptual experience, cognition is addition. It can besides actuate employees to make full the mark of the budget. When employees participate to put a budget so the mark can be accomplishable by deputation of authorization. Because employee can believe that they are a portion of the administration. For the engagement, internal communicating is being made so that budget can be end congruent. On the other manus, it is clip devouring. To put a budget is takes long clip so that it is besides cost affected.

Outcome 4:

There are assorted parts of the concern are involved to measure the public presentation of the administration against budget. Here, in the undermentioned by analyzing the Responsibility accounting and discrepancy analysis ; the public presentation of the administration has been evaluated.

Duty Accounting:

Responsibility accounting is a method to measure the public presentation of program by budget and its effect. Harmonizing to Brammer and Penning ( 2001 ) , “ Responsibility accounting is used to depict a manner of looking at an administration in footings of countries of duty, which could be sections, activities or map. ” To measure the public presentation of duty accounting in the administration it has four parts which is demoing in following Figure 14:

Cost Centre:

Cost Centre in duty accounting, where the director are responsible for cost merely. Example: In a concatenation hotel, the care section will be the cost Centre where the care director is responsible for cost. So when he will do budget so he will emphasis on cost to better public presentation. If director could cut down existent cost from the budgeted cost so it shows the better public presentation of the cost Centre or if it is rearward so it shows the lower public presentation.

Gross Centre:

In gross Centre director will responsible for lone gross. Example: In a concatenation hotel, gross revenues section is the gross Centre. And the director of gross revenues section is merely responsible for gross. So, during the fixing budget director will concentrate on gross and if he could derive more gross from the budgeted gross so it shows the good public presentation of the gross Centre.

Net income Centre:

In net income Centre, director accountable for cost and gross. Example: In a concatenation hotel, the hotel director is in charge for cost and net income. Here in budget, the hotel directors will emphasis on both cost and gross to maintain public presentation better.

Investing Centre:

There director are responsible for cost, gross and besides investing. Example: The regional director of concatenation hotel might be responsible for investing, gross and cost. So if the regional director be aftering for new hotel so he would be responsible for cost, gross and investing. So during fixing budget he would more accent on investing, cost and gross to demo better public presentation in the administration.

Discrepancy Analysis:

Discrepancy analysis depicts the difference between the existent and expected consequence. So the public presentation of the administration can easy measure utilizing discrepancy analysis.

Discrepancy analysis has been demoing in following Figure 15:

In discrepancy Analysis, if existent consequence is improved than expected consequence so public presentation of the company is in favorable or if the existent consequence is worse than expected consequence so the public presentation of the company is in inauspicious

Therefore, there are assorted parts in the administration whose public presentation can measure by the duty accounting and discrepancy analysis easy.