(Solution) ACT501 MBA Financial and Managerial Accounting

Solution

Write a 3000-to-4000-word literature review on any topics related to financial accounting or managerial accounting but outside the topic areas covered in class.

Possible Topics of Projects

The following list is for your reference only. You are not limited to it. You may choose any topic you wish as long as it is related to managerial accounting or financial accounting

1. Cybersecurity Risks in Financial and Managerial Accounting: Mitigation Strategies.
2. Blockchain Technology in Financial Accounting: Opportunities and Challenges.
3. The Impact of Artificial Intelligence on Financial Statement Audits.
4. Standard costs and variances analysis
5. Classification of costs for planning, control, and decision-making purposes
6. Data analysis and management accounting
7. Management accounting in the digital economy
8. The role of management accounting in the knowledge economy
9. Artificial intelligence and management accounting
10. The effect of fair value accounting on the significance of financial statements
11. The impact of applying fair value accounting on the quality of financial statements
12. Measurement and accounting disclosure of intellectual capital
13. Evaluating the quality of accounting information systems and their impact on improving financial performance
14. Accounting disclosure of social responsibility and its impact on companies’ performance.
15. Activity-based cost accounting system and its relationship to financial performance
16. The suitability of accounting systems for the e-commerce environment
17. The extent to which published accounting information affects the market price of the stock
18. The extent to which the application of governance principles contributes to the financial performance of companies.

Selected Topic: Classification of costs for planning, control, and decision-making purposes

Abstract

Cost Classification plays an important role in both financial as well as managerial accounting, as it helps organisations in planning, control, and making sound decisions. This literature review investigates the classification of costs by behaviour, function and relevance to decisions. It looks at the effect of direct and indirect costs, fixed and variable costs, relevant and sunk costs on budgeting, variance analysis and strategic planning. It also shows the effect of cost classification in performance evaluation and operation efficiency. Key theoretical frameworks such as activity-based costing and the standard costing are discussed to analyse their applicability in enhancing financial control. This paper also examines some contemporary challenges such as complexities in cost allocation and latest technological enhancements in cost tracking. It is clear in the findings that accurate cost classification assists in financial transparency, resources optimisation and decision making on managerial level. The study reaches the conclusion that financial sustainability and competitive advantage depends on deep understanding of cost structure.

1.0 Introduction

Cost Classification is the organisation of costs into groups for the purpose of effective planning, control and decision making. These costs are classified according to behavioural characteristics (fixed, variable or mixed), functional aspect (direct or indirect) and the relative significance in decision making (sunk, relevant or opportunity costs). It enables businesses to perform financial analysis, resource allocation, and make strategic decisions. Costs are classified to assist the organisation in planning for future expenses, establish budgets and determine profitability. It also helps to track financial performance and identify inefficiencies so as to support the variance analysis and cost reduction strategies in cost control. Also, cost classification is important for decision making since it is required for accurate pricing, investment analyses, and operational analyses. Techniques like activity-based costing (ABC) and marginal costing help to reveal deeper insights in cost behaviour and allocation thereby improving financial transparency. This literature review looks at some of the existing cost classification approaches and their role in managerial as well as financial accounting. The paper discusses theoretical models, practical applications and challenges in cost classification in modern businesses. This study aims at identifying current research in order to shed light on best practices and current trends in the effectiveness of cost management. Understanding cost classification enables a firm to maintain financial sustainability and gain a competitive advantage in the market.

2.0 Literature Review

This literature review seeks to analyse the cost classification concept, cost classification methods and their importance, challenges, uses and best practices for future enhancement of the cost management effectiveness. Organisations use cost classification to optimise their financial sustainability which will be illustrated through theoretical models. In addition, cost classification methods are explained based on their relationship to strategic decision making. These classifications help businesses improve the cost efficiency, regulatory compliance and a competitive advantage in a business environment that is rapidly changing.

2.1 The Concept of Cost Classification

Cost classification, as per Al-Refiay et al. (2022), is the grouping of costs according to nature, function, behaviour or relevance to decisions. Consequently, they offer benefits in budgeting, cost control, and financial reporting. According to Zhang et al. (2022), the primary benefit of cost classification is to assist managers in managerial decision making through providing them with information on cost behaviour and cost allocation. Dana et al. (2021) echo this saying that cost classification is a very important entity in financial sustainability of the organisation as it can help an organisation discover, examine, and also control cost. Costs classification, as presented by Dashkevich et al. (2024), refers to the categorisation of costs based on predetermined criteria, such as traceability, nature of behaviour or function, to improve transparency of financial reporting. Classification of costs provides an effective means to link an organisation’s cost structure to strategic goals. Cost classification provides a means for measuring the performance and cost reduction initiatives (Gunarathne et al., 2020). Bravo et al (2021) also assert that cost classification helps organisations to maximise profitability and resource allocation by determining cost drivers and cost management best practices.

2.2 Cost Classification Methods

The main cost classification methods are by behaviour, function, traceability and relevance to decision making. One of the widely used methods of classification is based on behaviour that includes grouping of costs under fixed cost, variable cost and mixed cost (Imeni et al., 2021). Fixed costs are constant cost, but variable costs are reliant on the amount of output. Due to the fixed and variable components of mixed costs, they are very difficult to analyse. According to Liu (2022), this classification is used by businesses for cost volume profit (CVP) analysis and break-even calculations. The other approach of classification is by function where costs are classified into production, administrative, selling and distribution, as well as Research & Development costs (Liang et al., 2023). The production costs are direct and indirect where the direct costs are traceable to a product, while the indirect costs need allocations. The administrative costs relate to office expenses, and R&D expenses are for product development, while selling and distribution costs are for marketing and logistics. Classification by traceability differentiates between direct and indirect costs (Gayialis et al., 2022). Direct costs can be allocated to a cost object that is specific, for example, a particular product or a particular project. However, as Quesado & Silva (2021) explain, indirect costs benefit more than one cost object and must be allocated systemically, typically using methods like activity-based costing (ABC). Finally, costs are classified by their relevance to decision-making as relevant, irrelevant, sunk, opportunity, and controllable vs. uncontrollable (Ronayne et al., 2021). Sunk costs are past expenses and should not influence decisions in future, but relevant costs may impact the decisions that will be made in the future. Opportunity costs are benefits that are lost when organisations choose one option over another (Vanness et al., 2021). The controllable costs can be controlled at departmental level whereas the uncontrollable costs are arising from external sources for instance regulatory fees.

2.3 The Importance of Cost Classification in Planning, Control, and Decision-Making

Cost classification is very vital in an organisation. As argued by Sanaya (2022), the effective financial management of any organisation is achieved through cost classification.
2.3.1 Importance in Planning………..

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