There are various types of cost that the organization can apply. Types of cost include; Marginal Costing, Absorption cost, fixed cost, Standard Cost and opportunity cost.
Marginal Costing: - This is defined as cost change in total assets results from a unit change in one output. There are variable costs Associated in the increasing of short run. Marginal Cost can be marginal cost per unit or some time marginal cost of a department or operation. Marginal cost gives information to management for; planning, Decision Making, Short run activities involve in the volume or activity cost changes.
Absorption Costing: - A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting.
Opportunity Cost; the cost of passing up the next best choice when making a decision.Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in financial statement.
Read more: http://www.investorwords.com/3470/opportunity_cost.html#ixzz26q5xoQrD
Different Method of costing includes; batch costing, unit costing, Process Costing and Multiple costing.
3)FiFO (First in first Out)
Date
Receipt
Purchases
Balance
06/08
200*0.20 = 40
200*0.20 = 40
06/12
175*0.25 = 43.75
175*0.25 = 43.75
200*0.20 = 40
06/18
(215)
200*0.20 = 40
15*0.25 = 3.75
160*0.25 =40
06/22
125*0.30 = 37.5
125*0.30 = 37.5
160*0.25 = 40
06/30
500 121.25
(250)
160*0.25 = 40
90*0.30 = 27
35 10.5
500 121.25
35*0.30 = 10.5
LIFO (Last in First Out)
Date
Receipt
Purchases
Balance
06/08
200*0.20 = 40
200*0.20 = 40
06/12
175*0.25 = 43.75
200*0.20 = 40
175*0.25 = 43.75
06/18
(215)
175*0.25 = 43.75
40*0.20 = 8
160*0.20 =32
06/22
125*0.30 = 37.5
160*0.20= 32
125*0.30 = 37.5
06/30
500 121.25
(250)
125*0.30 = 37.5
125*0.20 = 25
35 7
500 121.25
35*0.20 = 7
After analyzing and calculating both FIFO and LIFO it founds that FIFO is the best method for company, because the stock which have now in FIFO which will represent the market price. While the economy has stable prices. However the price increases is high, Using FIFO result in what is called" inventory profits" these are profit just come from holding against inventory and increasing physical assets. But it does not provide the best results for matching costs and revenue.
LO3
Budgeting
Isidentified asthe methodof creating plan to spend the money. Creating expenditure plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is categorized in to three main purposes:
Forecasting of income and spending= Budgeting is one of the main part of the business planning process. Owners and managers must to be able to guess whether a business will make a profit or not. A budget is basically a model of how the business might perform, at last, if certain strategies, events, plans are carried out.
Tool for Decision making = As soon as the budget has been set, the budget provide financial frame work for decision making process i.e. is the proposed course action something they have planned for or not.In handling a business responsibly, expenditure must be tightly controlled. When the budget for advertising has been fully expended.
Monitoring Business Performance = once the budget is in place, it empower the actual business performance to be measured against the forecast business performance i.e. is the business living up to our expectations.
Illustration of the purpose of budgeting as a method for monitoring business performance
Figure 1
IN the figure above, "variance" is the difference between budgeted expenditure and actual expenditure.
Advantages of budgeting
It is easy to misplace view of where company is making most of its money. During the scramble of day-to-day management.
Helps the management to plan for the most efficient use of labor, material and capital.
Budgeting supports and understanding among members of top level management and
Their co-workers' Problems.
Forces management to consider expected future trend and conditions.
Disadvantages of budgeting
Budgeting required lot of time.
Blames and misunderstanding between departments- if the department is not able to achieve their budgeted results, department head may blame other department that provide service to it for not having sufficiently supported his department.
Zero Base Budgets
Zero Based Budget is known as the method of budgeting in which all expenses must be justified for each new period. Basically this budgeted start from "Zero Base" And every function within an organization is analyzed for its cost and needs. Then budgets are built around what is needed for upcoming period, regardless of whether the budget is higher or lower than preceding one.
Zero Based Budget (ZBB) Allows executing at a high level strategic objectives in the budget preparation process by connecting them specific functional areas of organization, where costs can be collected first, then measured against earlier results and current expectations.
FlexibleBudget
Flexible Budget is known as Budget which is flexible to adjust the budget or flexes for changes in the volume of activity. Budget more sophisticated and flexible benefit from a fixed budget, which is still in one amount regardless of the volume of activity
3)
JulyAugust
May 30, 000 * 20% = 6,000June 40, 000* 20% = 8,000
June 40,000 * 30% = 12,000 July 55,000* 30% = 16,500
July 55,000 * 50% = 27,500 August 45,000 * 50% =22,500
Total 45,500 Total =47,000
September
July 55,000* 20% = 11,000
August 45,000 * 30% = 13,500
September 65,000 * 50% = 32,500
Total 57,000
July
August
September
20%
30%
50%
6,000
12,000
27,500
8,000
16,500
22,500
11,000
13,500
32,500
45,500
47,000
57,000
Purchase of company "Zero"
July 15% of 15,000 August 15% of 20,000
85% of 20,000 85% of 30,000
September 15 % of 30,000
85 % of 40,000
July August
15,000 * 15 % = 2,250 20,000 * 15% = 3,000
20,000 * 85% = 17,000 30,000 * 85 = 25,500
Total = 19,250 Total = 28,500
September
30,000 * 15% = 4,500
40,000 * 85% = 34,000
Total = 38,500
Cash Budget
July
August
September
Opening Balance
+ Receipt from debtors
+ Insurance
50,000
45,500
7,000
67,250
47,000
69,750
57,000
Total Cash
- Payment to credit
- Wages
- Over Head (Depreciation)
- Tax
102,500
(19,250)
( 5,000)
(5,000)
( 6,000)
114,250
(28,500)
(5,000)
(5,000)
(6,000)
126,750
(38,500)
(5,000)
(5,000)
(6,000)
Total Payment
Ending Balance C/F
(35,250)
67,250
(44,500)
69,750
(54,500)
72,250
