1. “Cost may be classified in a variety of ways according to their nature and the information needs of the management.” Explain.
Ans: Costs can be classified according to their nature and information needs of the management in the following manner :
i. By element : Under this classification costs are classified into (a) Direct costs and (b) Indirect costs according to elements viz., materials, labour and expenses.
ii. By function : Hence costs are classified as : production cost; administration cost; selling costs; distribution cost; research cost; development cost, etc.
iii. By behavior : According to this classification costs are classified as fixed; variable and semi variable costs. Fixed costs can be further classified as committed and discretionary.
iv. By controllability : Costs are classified as controllable and non-controllable costs.
v. By normality : Under this classification costs are segregated as normal and abnormal costs.
Management of a business house requires cost information for decision making under different circumstances. For example they required such information for fixing selling price , controlling and reducing costs. To perform all these functions a classification of cost according to their nature and information needs is an essential pre-requisite of the management.
2. “Relevant cost analysis helps in drawing the attention of managers to these elements of cost which are relevant for the decision.” Comment.
Ans : Relevant costs are pertinent or valid costs for a decision. These bear upon or ‘ influence decision’ and are directly related to the decisions to be made. These are critical to the decision, and have significance for it. These are the cost which generally respond to managerial decision making, and have significance in arriving at correct conclusions. These costs are capable of making a difference in user-decisions and enter into a choice between alternative courses of action. In specific terms, relevant costs for decisions are defined as ‘expected future costs that will differ under alternatives”.
Relevant costs are futuristic in nature. These are the costs that are expected to occur during the time period covered by the decision. The costs are different between alternatives being considered.
3. What is Responsibility Accounting ?
It refers to a control system of management accounting and reporting. The basis of Responsibility Accounting is the creation/recognition of various responsibility/decision centres in an organisation. The individual managers of these centres are made responsible for the insurance and control of costs relating to their responsibility centres.
The main feature of responsibility accounting is that it is more concerned with control of costs than their determination. The system would trace costs (revenues, assets and liabilities, also where relevant) to the individual managers who are primarily responsible for making decisions about the costs under review. In other words, the executive in charge of every responsibility centre would have authority to incur costs relating to his responsibility centre and accountable to them. If he does not have the authority to incur costs he will also not be responsible for their control. The performance of the managers of the various responsibility centres ...