Management Accounting Report: Cost Classification and Batch Costing

This report delves into the core concepts of management accounting, focusing on cost classification and the application of batch costing within a business context. The report begins by defining and differentiating between direct and indirect costs, explaining their significance in cost object identification. It then explores various bases for cost classification, including nature of expenses, traceability to cost objects, and activities or functions. The second part of the report focuses on batch costing as an appropriate cost technique for a hypothetical company, Flowers Finesse Company, detailing how it can be applied to improve profitability through selling price fixation, budgetary control, and effective cost control. The report also emphasizes the benefits of batch costing over other techniques, particularly in scenarios involving similar products and production processes. The Economic Batch Quantity (EBQ) is also discussed, highlighting its role in optimizing production levels. The report concludes by highlighting how this technique can help the company to manage its inventory efficiently and improve its profitability.

Running head: MANAGEMENT ACCOUNTING
Management accounting
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Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................5
Reference....................................................................................................................................7

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Answer 1
Identification and explanation of cost classification –
Cost can be segregated based on the level of traceability of the cost object that is a
project, a product and a department into the below mentioned types –
 Direct cost
 Indirect cost
Direct cost –
Costs those are easily recognizable or identifiable to the cost objects are called as
direct cost. If the project is cost objects, then the direct cost signifies the resources and costs
that are traceable or recognizable with the project (Drury, 2013). The direct cost examples are
direct labour, direct material and direct overheads.
Indirect cost –
Costs that cannot be identified or traced with the cost object are known as indirect
costs. For example, in case of Flower Finesse Company costs of administration staff, sales
office and salary of the manager will be regarded as indirect cost as these costs are not
directly related to the product and related to the production as well as administration and
sales (Parambath, Usunier & Grandvalet, 2014).
Classification of cost is crucial as the overhead expenses cannot be identified to the
product it creates issues while the cost is analysed and determined. Further the apportionment
of the indirect cost needs application of the judgements on account of the cost. The indirect
costs are traceable only through allocation in logical manner. Any cost can be indirect or

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direct based on the circumstances. The segregation of cost also depends on the nature of
business.
Three different bases for classification of cost
Various bases are there on which the cost can be classified. The major bases of
classifications are mentioned below –
 Nature of the expenses – through nature of the expenses the costs are segregated into
variable cost and fixed costs. Cost that changes with the changes in production units
are the variable costs and on the contrary the costs that does not change with the
changes in production units are known as fixed costs.
 Related to the cost object – traceability – under this the segregation are made in
association of the costs elements with cost object. Here the costs are segregated as the
indirect cost and direct cost. The segregation here signifies the cause and impact
relationship among the cost object and cost element of the costs to the cost object
(Jenkins & Farid, 2015).
 Activities or functions – here the costs are classified based on different activities or
activities. Common classifications based on this classification are administration,
production, selling, distribution, finance, quality check and development and research.
Classification of cost will help Mrs and Mr Long to improve the process of decision
making regarding the profit planning, managing cost and computing the break-even analysis,
proper absorption of the overhead expenses and budgetary control.
Answer 2
Appropriate cost techniques for Flowers Finesse Company –

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The costing method that will be most appropriate to the Flowers Finesse Company is
Batch Costing. This is the extension for job costing. The batch represents the number of
small orders those are passed through factory in batches. Each of the batches is separately
valued and treated as the unit cost. Further the unit cost is measured through dividing the
batch cost by number of the units produced in one batch. When orders are received from
various customers, generally there are common products among the orders and therefore the
orders can be issued in batches that may contain predetermined quantity for the product. This
method is adopted in case of each of the batches (Cooper, 2017). For example, in case of
Flower Finesse Company the cost of growing the flowers, cost of labours and the cost of
fertilizers, pesticides, cost of refrigeration as these costs are directly related to the cost of the
product that is flower. The direct costs are able to be measured with the high accuracy degree
as these costs are directly traceable to the cost object like department or product. Further, it
will also help in processing the cost data (Thomas & Gilbert, 2014) and will allow the
ascertainment of cost for services or products. It further helps in taking major management
decisions related to product mix. The profits are maximized through controlling the costs or
increasing the selling price. The batch costing is used generally under the below mentioned 2
situations –
 When the customer orders quantity for identical items or,
 When the order for internal manufacturing is generated for the batch of identical parts.
It will also help them to do the following -
 Selling price fixation – Selling price fixation is an important aspect to maximize the
profitability. Batch costing will also allow the management to apply most appropriate
policy for fixing the selling price.

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 Budgetary control – for preparing the efficient budgetary control and flexible budget
the cost determination is pre-requisite. Further, the flexible budget designed to be
changed as per the changes with activity level and therefore the behaviour of cost is
an important aspect (Bhattacharya, 2014).
 Effective control on cost – profit can be maximised through effective control on cost
and reduction of cost. Batch costing will help in controlling the cost efficiently and as
the fixed costs are the manageable and controllable costs.
Moreover, batch costing will help Mr and Mrs Long to produce the Economic Batch
Quantity. The economic batch quantity (EBQ) is identical to the economic order quantity
(EOQ) and the only difference is that EBQ is measured to decide the production level at the
minimum cost whereas the EOQ is measured to determine ordering level to purchase the
store, spares and raw materials (Eldenburg et al. 2016).
Therefore, the batch costing system requires less involvement of the management as
the production will be carried out in batches and the jobs that is carried out is of repetitive
type. Further, as the job is of repetitive type the employees do not need special knowledge
and regular training. Therefore, the idle time will be lower and the efficiency of the
employees will be enhanced. Further, the inventory management will be easier and the
company can analyse the stock for issuing to the customers those come through the door and
to the regular customers. It will assist them in increase the profitability through ideal issuance
of stock. As Flower Finesses Company’s main product is different types of flowers that are
mainly sold in batches, adopting the batch costing will improve the company’s profitability.
Answer 3
Reasons why the chosen technique that is batch costing method will be superior as
compared to other technique –

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Batch costing technique will be most appropriate as compared to other techniques for
Flowers Finesse Company as the company is facing issues related to sales management with
regard to short supply for the products. Moreover, due to shortages the company cannot sale
its products to the 1st customers that come to the door for purchase (Black & Al-Kilani,
2013). They are provided with the requirement only after partially satisfying the demand of
the regular customers. In this way the company is losing its revenue from the customers those
come through the door. Further, the company produces and sells similar type of products that
is flowers that can be easily measured with batch costing. The EOQ calculation will assist Mr
and Mrs Long to decide about the production volume that will enable them to maximize the
profit through selling the product to regular customers and door customers in most profitable
way. This can be done through batch costing as the products of Flower Finesse Company
require similar kind of production process and raw material. However, the production volume
can be determined in advance through application of Economic Batch quantity.

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Reference
Bhattacharya, H. (2014). Working capital management: Strategies and techniques. PHI
Learning Pvt. Ltd..
Black, G., & Al-Kilani, M. (2013). Accounting and finance for business. Pearson Higher Ed.
Cooper, R. (2017). Target costing and value engineering. Routledge.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Eldenburg, L. G., Wolcott, S. K., Chen, L. H., & Cook, G. (2016). Cost management:
Measuring, monitoring, and motivating performance. Wiley Global Education.
Jenkins, M. J., & Farid, S. S. (2015). Human pluripotent stem cell‐derived products:
Advances towards robust, scalable and cost‐effective manufacturing
strategies. Biotechnology journal, 10(1), 83-95.
Parambath, S. P., Usunier, N., & Grandvalet, Y. (2014). Optimizing F-measures by cost-
sensitive classification. In Advances in Neural Information Processing Systems (pp.
2123-2131).
Thomas, D. S., & Gilbert, S. W. (2014). Costs and cost effectiveness of additive
manufacturing. NIST Special Publication, 1176, 12.