<University Name> THH3113: Cost Classification and Control Report

This report, prepared for THH3113 at , provides a comprehensive overview of cost classification and cost control techniques within a business context. It begins with an executive summary highlighting the importance of cost management for maximizing profits. The report then delves into various cost classifications, including variable, fixed, semi-fixed, semi-variable, direct, and indirect costs, providing detailed definitions and examples for each. Key concepts such as cost drivers and cost-based pricing are also examined. The report further explores cost control techniques, differentiating between internal and external methods, and discussing tools like budgetary control, standard control, ratio analysis, and value analysis. The analysis extends to specific examples, such as the DOSM case, where the report analyzes costs associated with event management, including venue costs, event staff, equipment, and social media expenses, and then determines the most acceptable offer for the business. This detailed examination provides a practical understanding of cost management principles and their application in real-world business scenarios.

Running head: THH3113 1
THH3113
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Executive summary
Cost classification and cost control techniques are considered as one of the most
important and significant areas in the business to ensure that profit are maximized by
minimizing on expenses. The article gives a brief explanation on the importance of a
business management to categorize various costs based on the individual unit of an item
that would result to a change in the overall costs. These costs include variable costs,
semi-variable, semi- fixed, direct and indirect costs. During distribution of these costs the
business should ensure to use various cost control techniques such as value analysis, ratio
analysis, budget control and standard control to ensure cost incurred bring an added value
to the business. In addition to that, it shows the need of the organization to input cost
based on pricing which is the activity of setting prices based on the cost of producing a
product and providing a service. This article provided means that made it possible to
learn and study on a section of cost classification, cost drivers, cost control techniques
and its application in real business venture to identify most profitable business
opportunity.

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Table of Contents
Executive summary.........................................................................................................................2
Variable costs..................................................................................................................................4
Fixed costs.......................................................................................................................................4
Semi-fixed cost.................................................................................................................................4
Semi-variable cost...........................................................................................................................4
Direct cost........................................................................................................................................4
Direct material.................................................................................................................................5
Direct labour...................................................................................................................................5
Directed expenses............................................................................................................................5
Indirect cost.....................................................................................................................................5
Indirect material..............................................................................................................................5
Indirect labour.................................................................................................................................5
Indirect expenses.............................................................................................................................5
Cost drivers......................................................................................................................................5
Cost-based pricing...........................................................................................................................5
Cost control.....................................................................................................................................6
Cost control techniques...................................................................................................................6
Tools of cost control........................................................................................................................6
Internal............................................................................................................................................6
Budgetary control............................................................................................................................6
Standard control..............................................................................................................................6
External............................................................................................................................................7
Ratio analysis...................................................................................................................................7
Value analysis..................................................................................................................................7
Appendices.....................................................................................................................................10
References......................................................................................................................................12

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Task 1: Categorizing costs based on the cost drivers and evaluating examples of cost
drivers in DOSM
Classification of costs according to costs drivers, (Toompuu, & Põlajeva, 2014).
Variable costs
These are type of costs that rises or falls relatively with the amount of venture that is, it is the
portion of the cost of a venture that changes with the amount of output. The cost level, for
instance, is one then production is one.
The cost rises equally with the rise in the undertaking level; thus the variable cost function is
given by a clear line starting at the origin of the graph
This cost is considered as a cost driver as a change in a unit of activity may result in a
proportionate difference in the cost of the venture or the operational costs
This activity base is an amount of effort that operates as a natural component in the incurrence of
variable costs. Therefore, in managing these costs, cost accountants should be very familiar with
the various cost drivers (operation bases) within the business
Examples of variable costs are remuneration paid to casual staff paid on an hourly basis and
number of customers served in a given event at the agreed time. With variable costs, the cost
level is one when manufacture is one.
Fixed costs
These are costs that do not vary with the amount of production. It is also known autonomous
cost, as it remains the constant regardless of the output level.
Fixed costs that cannot be avoided in the short run are called committed fixed costs. They
sometimes are also referred to as capacity costs. Such costs concern senior managers for strategic
decision making. Discretionary fixed costs are those that can entirely be avoided without having
an immediate impact on the level of activity. These costs are subject to management decision e.g.
advertisement costs.
Semi-fixed cost
These are costs that have a fixed and variable cost factors. The fixed factor is that part that does
not change with the amount of output. They are variable within a given venture level but are
constant within other venture levels
The variable part is considered as the cost that rises or falls relatively with the level of
undertaking
They are sometimes referred to as step costs.
Semi-variable cost
These are costs with both a fixed and variable cost factor. The fixed factor is that part which does
not vary regardless of the level of production. They change within particular activity quantities
but are constant within other production levels.
Direct cost
These refer to costs that can be immediately associated with and traced in the production of a
given object at a particular level of activity. Direct costs include:

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Direct material
This refers to costs incurred in the acquisition of physical inputs involved in the production
process; these materials include raw materials, work in progress and consumable materials
Direct labour
These are wages paid to employees whose efforts can be traceable to the production of a product
Directed expenses
These are costs incurred on expenses which can be directly associated with the production
process
Indirect cost
These refer to costs that cannot be immediately associated with and traced in the production of a
given object at a particular level of activity. Indirect costs include:
Indirect material
This refers to the cost incurred in the acquisition of physical inputs involved in the production
process but cannot be immediately traced to the production process, these materials include raw
materials, work in progress and consumable materials
Indirect labour
These are wages paid to employees whose efforts cannot be immediately traced to the production
of a product
Indirect expenses
These are costs incurred on expenses which cannot be directly associated with the production
processes
Cost drivers
These refer to a unit of an object or component that would result to change in the overall cost,
(Ratnatunga, Michael, & Balachandran, 2012).
In the case of DOSM the cost drove cost for instance in the first event are:
Event staff this cost incurred is a cost-driven cost since a unit change in the number of staff
needed, number of hours worked and the wage rate per hour will change the cost. The other cost
driven factors include the number of chairs needed.
In the second event include number of mats, the event staff and the display screens required, any
change in the numbers of these items will result in a corresponding change in the cost incurred
by the organization.
Task 2: Analysis of costs directly associated with pricing and the cost control techniques
Cost-based pricing
This refers to the activity of mounting or making prices in relation to the costs suffered in the
manufacture or delivery of goods and services.

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The advantage of cost-based pricing and cost-plus prices is that the business is always
guaranteed to generating profit from this practice.
Event staff this is a cost directly associated with the general price of the service being delivered,
this cost is related to price in that the amount of time taken by each worker to provide a service
will determine the amount of profit gained on the cost on an hourly basis, therefore, time
management as a cost control techniques is important.
Secondly, the number of staff needed to ensure that services are delivered effectively and
efficiently by DOSM is another factor that will influence event staff to be cost-related as the
number of staff hired, if many will ensure more service is delivered in the shortest time possible
and the extra cost incurred on staff added to the price of the service.
Cost control
This refers to the regulation by the executive management to oversee that; there is a balance of
cost incurred in a given undertaking to ensure target of sales is attained.
Cost control techniques
This can be defined as various methods used by a business to attain maximum profit at the
lowest possible cost, (Arce, Mac, Shah, & Vega, 2012).
Tools of cost control
The techniques or tools used in controlling the costs incurred in the business attain given
standards into controlling costs these are:
Internal
The internal standards are used to regulate, control and evaluate the costs incurred within the
firm for instance cost on labor, material or other expenses
Internal cost controlling standards established include:
Budgetary control
A budget refers to a forecast financial statement showing the revenues and the expenses of a
business in a particular period of time.
Budgeting refers to the expression or articulation of a plan in an organization in numerical terms
Budgetary control, therefore, refers to a technique that uses budgets as way of planning and
controlling every detail or part of an organization’s activity.
The advantage of budgetary control is that it provides and sets a clear policy and defines the set
targets and objectives of a particular undertaking of the organization
Budgetary control also enhances adequate and proper planning and control of costs by
integrating the various activities in the organization
Standard control
This the most commonly used cost control technique as its objective is to define the set standards
of performance and set cost targets to be attained under a particular working situation.
Standard control can, therefore, be defined as the technique that aims at predetermining cost
which can be associated with a particular product or service under a certain condition.

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The merit of standard control is that it provides the management with a basis of setting prices
and shift costs in order to achieve maximum use of plant capacity and enhance cost reduction to
be able to generate higher returns
External
These are set of standards used by the organization to compare its performance with other
organization in order to come up with and shape a given number of cost ratios
The external cost control techniques include:
Ratio analysis
This is the most prominently used external standard used by an organization to compare
performance with other organizations and control costs.
The ratio refers to a yardstick used to provide estimates on the relationship between two
numbers.
An acceptable ratio is therefore first formulated then used to compare the actual performance and
the anticipated performance to come up with corrective courses of action to control costs
Value analysis
This is a system involved in cost saving by first analyzing the product design
The main advantage of value analysis is that it aims at identifying costs in a product which does
not in any way add functional value, thus it helps in cost reduction without necessarily affecting
the standard of which performance was set.
Ultimately, value analysis is a system which specifies the use of a product or its units and
formulates relevant costs, come up with various alternatives and evaluates them
The merit of value analysis is that it helps in cost reduction through proper evaluation of all the
necessary costs to be incurred in the production of a given production without necessarily giving
up the anticipated standards of performance laid out.
Task 3: Using the information provided to determine the most acceptable offer for the business
FIRST
EVENT
Category
Projected
subtotal
Estimated
costs
Venue costs
location rental 0 0
Event staff 26400 28908
Equipment 40000 40000
Decorations 200000 220000
Lighting 150000 150000
Signage 30000 30000
Speakers 12000 12000
Rockband 30000 48000
Video 25000 30500
Chairs 12000 18000
Social media
cost

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Twitter 2500 2875
Face book 3000 3450
Pinterest 1200 1380
Instagram 4000 4600
Google 2500 2875
LinkedIn 3000 3450
Snap chat 750 862.5
Advertising
Print 8000 6000
Outdoor 40000 56000
Radio 6000 18000
Television 10000 0
Drinks 4000 3600
Snacks 6000 6720
TOTAL 616350 687220.5
SECOND
EVENT
Category
Projected
subtotal
Estimated
costs
Venue costs
Location rental 40000 42000
Event staff 36000 52560
Equipment 45000 45000
Decorations 175000 262500
Lighting 140000 140000
Speakers 42000 47040
Yogic music 16000 24000
Video
production 18000 21960
Yoga mat 48000 44000
Social media
cost
Twitter 2500 2875
Face book 3000 3450
Pinterest 1200 1380
Instagram 4000 4600
LinkedIn 3000 3450
Advertising
Print 4800 3600
Outdoor 22000 30800
Radio 5400 18000

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Television 2000 10000
Drinks 8000 7200
Snacks 7000 7840
TOTAL 622900 772255

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Appendices
For the first event
At break even profit is zero
At break even, total revenue= total costs
Total cost= fixed cost + variable cost
Total revenue = price per unit * quantity
Total revenue for the first event = 135 * 8300
=1120500
Therefore total cost at break even = 1120500
Contribution margin = 35% of the total cost
= 35% * 1120500 =392175
Therefore total revenue = 1120500+392175
= 1512675
Variable costs = total operating expenses =687220.50
Fixed cost = 1512675-687220.50 = 825454.50
Variable cost = variable cost per unit * quantity
Variable cost per unit= 687220.50/8300
= 82.80
Breakeven point units (number of tickets) = fixed cost/ (selling price –variable cost)
= 825454.50/ (135-82.80)
=15814 tickets for the first event
Total revenue =number of tickets * price per ticket
= 15814 * 135
=2134890
For the second event
At break even profit is zero
At break even, total revenue= total costs
Total cost= fixed cost + variable cost
Total revenue = price per unit * quantity
Total revenue for the first event = 122 * 8300
=1012600
Therefore total cost at break even = 1012600
Contribution margin = 35% of the total cost
= 35% * 1012600 =354410
Therefore total revenue = 1012600+354410
= 1367010
Variable costs = total operating expenses =772255
Fixed cost = 1367010-772255 = 594755
Total fixed cost + cost price on mats
Therefore total fixed cost =594755+ 44000
=638755
Variable cost = variable cost per unit * quantity
Variable cost per unit= 772255/8300
= 93.50
Breakeven point units (number of tickets) = fixed cost/ (selling price –variable cost)

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= 638755/ (122-93.50)
=22413 tickets for the second event
Total revenue =number of tickets * price per ticket
= 22413 * 135
=2734386
The second event is the most profitable; DOSM should choose it as it generates the highest
revenue with the lowest fixed costs to be incurred

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References
Arce, A., Mac Dowell, N., Shah, N., & Vega, L. F. (2012). Flexible operation of solvent
regeneration systems for CO2 capture processes using advanced control techniques:
Towards operational cost minimisation. International Journal of Greenhouse Gas
Control, 11, 236-250.
Ratnatunga, J., Michael, S. C., & Balachandran, K. R. (2012). Cost management in Sri Lanka: A
case study on volume, activity and time as cost drivers. The International Journal of
Accounting, 47(3), 281-301.
Toompuu, K., & Põlajeva, T. (2014). Theoretical framework and an overview of the cost drivers
that are applied in universities for allocating indirect costs. Procedia-Social and
Behavioral Sciences, 110, 1014-1022.