Cost Classification Case Study

Question1.

Cost classification is useful and important because it classify a large number of costs into different cost pools. With similar costs in a single cost pool, it becomes much easier for managers to use that information to make appropriate decisions for different purpose and enhance the accuracy of decision-making (Mastilak, 2011).

As for Mr. and Mrs. Long, there are several different method of cost classification to help them make an improvement of Mal Ltd.’s decision-making system.

Firstly, it is very common to classify costs according to behavior. The costs of purchasing flower seeds, the costs of packaging flowers and the costs of importing some special flowers from Netherland are all variable costs, which will change due to the change of activity level, in this case, that is the number of flowers produced in a certain time period. Use the information of variable costs, Mr. and Mrs. Long can make decisions like how many orders can they accept to make higher profit or whether to expand the scale of their flower business more easily and properly. While, costs like the long-term rents, staff

and Mrs. Long to deal with current issues faced with the company. Firstly, the difficulties of growth in ensuring the opportune payments to employees and suppliers could be release if managers could make an expenditure budget and set up appropriate prices of flowers according to the estimate costs in current month by using the chosen method above, due to the fact that there now are only rough estimates of revenue and some main cost items are know. Also, to prevent the scale of operations grown in an uncontrollable way, the method chosen can help Mr. and Mrs. Long get the signal of the deficit before decisions cannot be reversed, because the method chosen could provide them the cost of each department to help them find out the problems more easily and