Cost Information To Help Managers Make Better Decisions

Cost Classification

Cost information provides a platform for managers to “manage resources efficiently and effectively to create customer value and shareholder wealth” (Langfield-Smith et al., 2015, p.40). According to Drury (2012), cost and management accounting information system should generate to meet the following requirements:

1. Allocate costs between cost of goods sold and inventories for stock valuation, internal and external profit measurement.

2. Provide information for planning, control and performance measurement.

3. Provide relevant information to help managers make better decisions.

Compton and Brinker (2005) say that it is essential to recognize what types of cost should be considered in the decision making process when the

A cost object refers to an item for which a cost is being separately assigned (Drury, 2012) such as product lines, customers and greenhouse machinery. If a manager is interested in price setting and profitability analysis, then the company’s product would be the cost object; Customers will become the cost object instead to determine the cost of dealing with the company.

Direct costs are those that can be traced to a cost object in an economic manner whereas indirect costs cannot be easily traced to the cost object in an economc manner (Langfield-Smith et al., 2015). Consider the cut flower as the cost object. The cost of seedling is a direct cost because a physically oberservable relationship exists between the cost (seedling) and the cost object (flower). The cost of fertilizers is a indirect cost as it is not feasible to allocate the cost specifically to thousands of flowers being produced. However, nature of the cost object creates difficulties in determing whether a cost is direct or indirect (Drury, 2012). ***For example, the transportation costs within the company is a direct cost of the product but is an indirect cost of each department of Sunflower***. Hence, when classifying costs it is important to recognize which cost object is being assessed in order to avoid uncertainty

In other words, controllable costs is manuipulated by the related department, despite other fixed cost like rental expense, which the paymen amount or quantity is contreacred in agreement in advance. Moreover, the importance od this cost catagory is evaluating performance of managers. Managers are regularly evaluated on budgetary performance as well as the sales and income performance of their department, most of the time these performance evaluations only take into consideration controllable costs(source....). Costs which is controllable is to monitor the performance of managers and allow top management to allocate budgets efficiently. Sunflower can control their units of flowers planted as there is high seasonlity in supply in order to decrease their costs. However, tax expenses and fixed ultilities is not controllable by the