a)Costs can be classified on the basis of cost objective which could be stock valuation or decision making or for control purposes. Describe each classification of cost.
Costs for stock valuation
In costs for stock valuation, all elements related to the production process (Direct and indirec costs) have to be accounted for in getting the accurate cost of a single product. In other words, Direct costs must include all direct materials, labor and other direct costs. Indirect costs must include all production overheads, administrative overheads, selling overheads and distribution overhead costs. All these costs must be included in the stock valuation.
Costs for decision making and planning
This classification looks into the relationship between costs and revenues, the behavior of costs in relation to changes in activity levels and the relevance if costs and revenues.
Managers are interested in knowing how changes in costs can affect their revenues. This will make them set reasonable prices that will increase the company 's revenues unlike high prices which will discourage the sales volumes and therefore lead to losses.
It is also important for them to know the nature of the costs they incur (Whether they are fixed costs, variable cost, semi variable or semi fixed costs) and how they react at different levels of activities. This will help the managers in controlling and maintaining the costs of production.
The relevance of costs and revenues is also important to the managers. They need to know what costs are relevant so that they can account for them in their decision making and planning. The irrelevant costs are not put into consideration in the decision making since they have no impact on the decisions. An example of...
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...division levels will help to provide feedback to the central management team. At times, central management fail to get accurate and timely feedback from divisions due to poor communication systems. Therefore, the appraisals will act as a bridge between central management and divisions in getting the required feedback in a timely manner.
Encourage Initiative and Motivation
Through divisional performance appraisals, local managers are given freedom to make decisions and delegate their authority to their subordinates which gives them a sense of self fulfillment. This will increase their motivation in promoting efficiency in the division.
Encourage Long term considerations
Division performance appraisal should promote the continuity of the company in the long run. Therefore decisions made should focus on the future prosperity of the division and the company as a whole.
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