Question

You have just been appointed the cost accountant of AMINIYA MANUFACTURING LTD. The management of the company, prior to your appointment have always resorted to the work of consultants in costing and pricing products. At your interview, you had indicated to management the importance of cost and the various classifications of costs. The interview panel, very enthused with your explanations decided to engage your services as an employee- thus, your appointment as a cost accountant. Required: Write a memo to management detailing the various classifications of costs and provide two reasons for which it is important to classify cost. Note: The memo should contain at most 200 words.

Answer 1

Dear management.

I am thankful to have been appointed as the cost accountant.

This memo is to introduce, briefly, some the most common costs classifications.

Costs can be classified mainly according to their nature, functions, and traceability.

Nature: they can be labor costs (wages paid to workers), material costs (money paid for material goods used in the production of something), and other expenses.

Functions: the costs are classified according to their function. They can be production costs (used in the production process), or commercial costs (used for selling and administrative purposes).

Traceability: the costs are classified depending on whether they can be traced back to the final product or not. They can be direct costs (can be traced back to the final product), or indirect costs (cannot be traced back to the final product).