Management Accounting - Cost Classification

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COST CLASSIFICATION ASSIGNMENT

To classify the various costs would first of all require a definition between the two types of accounting that practically all businesses have to face and a number of key terms which are equally important. These are management accounting and financial accounting.

1. THE DIFFERENCE BETWEEN MANAGEMENT & FINANCIAL ACCOUNTING:

Management accounting is concerned with decision making, cost apportionment, planning and control. It is based within the organisation and is solely for the use of the managers to conduct their business dealings. The process of management accounting is proactive meaning the company is looking ahead, not backwards.

Financial accounting on the other hand is externally based and is primarily concerned with the preparation of financial statements for organisations' stakeholders. Stakeholders would include shareholders and competitors. Unlike management accounting it has to comply with various financial legislations and standards. Financial accounting concerns using data from previous years which also means that the information which is used is generally out of date.

2. HOW ARE ALL THE COSTS CLASSIFIED?

To classify costs would require a number of key terms to be defined; all of which should be understood fully in the concept of management accounting. These are fixed / variable costs, incremental / controllable costs, direct / indirect costs and future / past costs.

Fixed costs are costs which do not change as the level of productivity increases. An example of this would be rent as this would have to be paid irrespective of how many units of a product a company produces. In contrast, variable costs are expenses which change in relation to the output produced. An example of this can be seen in the manufacturing industry, whereby the company pays for raw materials only when it is needed. If the level of activity decreases it is likely that the spending on those raw materials will fall. There are also costs which



Bibliography: BOOKS & JOURNALS: Bendry, M et al, 2003, Essentials of Management Accounting in Business, printed in UK, published by Thompson Learning Drury, C, 2001, Management Accounting For Business Decisions, Second Edition, Published by Thompson Learning Drury, C, 2003, Cost & Management Accounting: An Introduction, Fifth Edition, Published by Thompson Learning

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