Task 1

Question 1
a) Prepare a communal table to classify the cost in fixed, variable and semi variable cost

b) Explain other ways to classify the cost

There can be various bases on which classification of costs can be done. Following are the important
ones, we will discuss in brief.

1. Nature of Expense: By nature of expenses, costs are classified into material, labor and expenses.

2. Relation to Cost Object – Traceability: This classification is based on the relation of cost element
with the cost object. The classification is done into direct and indirect costs. The basis is cause and
effect relationship between cost element and cost object or traceability of costs to its cost object.

3. Functions / Activities: Costs can also be classified into various functions / activities. Common
functional classification of costs are done into following:

 Production
 Administration
 Finance
 Selling
 Distribution
 Research and Development
 Quality Check etc.

4. The purpose of Decision Making by Management: For decision-making purpose of management,

costs can be classified into various types such as opportunity cost, marginal cost, differential cost,
relevant cost, imputed cost, replacement cost, sunk cost, normal/ abnormal cost, avoidable/
unavoidable costs, etc.

5. Production Process: It’s an important classification for cost accounting of different manufacturing
industries. Based on the production process of the industry, costs can be classified into following:

 Batch Cost
 Process Cost
 Operation Cost
 Operating Cost
 Contract Cost
 Joint Cost

6. Time Period: Based on a time period of assessment or any other specific purpose, costs can be
classified into historical cost, pre-determined cost, standard cost, and estimated cost.
Task 3
QUESTION 6
a) Definition of budgeting
A budget is an estimation of revenue and expenses over a specified future period of time; it is compiled
and re-evaluated on a periodic basis. Budgets can be made for a person, a family, a group of people, a
business, a government, a country, a multinational organization or just about anything else that makes
and spends money. Among companies and organizations, a budget is an internal tool used by
management and is often not required for reporting by external parties.

Basically, a budget is a microeconomic concept that shows the tradeoff made when one good is
exchanged for another. In terms of the bottom line – the end result of this tradeoff – a surplus budget
means profits are anticipated, a balanced budget means that revenues are expected to equal expenses,
and a deficit budget means expenses will exceed revenues. Budgets are an integral part of running any
business efficiently and effectively.

a) Purpose of budget
There are several purposes for the preparation of the budget;

 The major purpose of budgeting is to forecast the sales, cost and expenses of the organization.
 The performance of the company can be measured with the help of budgeting.
 Decision making process can be possible to be performed effectively and efficiently in the
organization.
 The budget makes the organization possible to evaluate the availability of the funds in the
company (Alino & Schneider, 2012).
 The prior planning of the budget is done to allocate the resources of the organization in an
effective manner.
 Control can be maintained and monitored in the organization for the betterment of the
operations in all departments.
 The budget prepared in the organization provides the direction to the company for the
achievement of the organizational goals and objectives.
 The cash flow of the company can be predicted in advance so that the company can utilize the
available resources in the organization (Alino & Schneider, 2012).
 With the effective budget process, coordination among the managers in an organization can be
developed in order to maintain the minimum cost in the production process.
 One of the important elements of budgeting process is to eliminate or reduce the risk in the
business of the company.

b) Different methods of preparing budget

There are different budgeting methods that are used in an organization. The companies select the
appropriate budgeting methods according to the needs and nature of the organization. Some of the
methods of budgeting are;
Zero based budgeting: The budget in the zero based budgeting starts from the zero. The process of
budgeting in this method starts from zero bases and determining the allocation of the resources in each
department of the organization along with the review of the budget on regular intervals. There are
several steps that are performed in the zero based budgeting which includes the decision making
activities of the managers and the efforts of the managers are focused on the reduction in the costs as
well as elimination of duplication of activities (Glass & Prinzivalli, 2014).

The needs of zero based budgeting are;

 The zero based budgeting ensures the accuracy and efficiency in the preparation of budget.
 The method of zero based budgeting is helpful in the determination of the cost effective
operations in the business of the organization.
 The decision making process of the organization is improved as the managers are involved in
effective decision making regarding the reduction of cost.

Incremental budgeting: For the purpose of the preparation of the incremental budget, the previous
budget and the actual performance of the organization is taken into consideration in order to prepare
the forecasted budget for the company which focuses on the increments in the cost and the added
amount in the budget. The process for the preparation of the incremental budgeting is simple as only
incremental changes are added in the new budget in comparison to the budget of the previous year. The
incremental method of budgeting is suitable only to those organizations which have the fixed costing
and there are not many deviations of cash flows in the operations of the organization (Alino &
Schneider, 2012).

The needs of incremental budgeting are;

 The incremental budgeting process is simple as it does not contain the process of preparing a
fresh budget and the new budget is prepared taking into consideration the previously prepared
budget.
 The departments of the organization have the stable operations and this benefits the
organization in performing the operations effectively.
 The funds are available for the organization on the continuous basis.
 The changes that affect the business of the organization can be detected timely (Alino &
Schneider, 2012).