Fancy Chocolate: Cost Classifications

Costs are classified depending on how the cost information will be used by the company. Fancy Chocolate needs to gather cost information first before choosing the appropriate costing system. Cost classifications are based on cost behaviour, cost traceability, cost controllability, value chain, manufacturing or product costs, and/or timing of the expense. From using these basis of classifications, costs can be classified as variable costs, fixed costs, direct costs, indirect costs, controllable costs, uncontrollable costs, upstream costs, downstream costs, manufacturing costs, direct material costs, direct labour costs, manufacturing overhead costs, product costs, and/or lastly, period costs (Langfield-Smith, Thorne, Hilton, 2015).

Cost classification

A hybrid costing system is most suited for organisations producing in batches. Costs will be allocated to the batches. Hybrid costing is used for similar or identical products that have different modifications at the end. For example, laptops have screens and keyboards built in every unit but have different designs for each product type. With hybrid costing, managers find it easier to determine profits of individual jobs and also obtain some detailed statistics of production from different departments. Hybrid costing systems do not focus enough on costs that are based on activities, creating possibilities of understating

However, each product type is produced in large numbers and the production processes are repetitive with direct materials, direct labour, and also variable manufacturing overhead. In short, each product uses the same amount of direct costs as other products in the same product type. Process costing is most suited for Fancy Chocolate’s direct costs. However, since this new order from the national supplier is a special order, F.C will need to make new chocolate bars with different flavours and ingredient additives. When special custom orders are made, job order costing is suitable. With the combination of process costing and job order costing, the hybrid costing system should be used to cost direct