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Ability of the system to trace indirect cost to productive activities and vice versa



Category: Budgeting Methodology

The indirect costs which a company has to spend to keep its operation going are not a predestined fact and no legacy from the past. During the annual budget preparation, each indirect cost item has to be critically assessed and it has to be ascertained that each indirect expense is justified through the contribution it makes to productive activity of the company. Such a system:

  • (a) provides for clarity as to how the different types of cost (e.g. employee salaries) spent for an auxiliary function (e.g. assisting activity 2) serve production activities.
  • (b) must be capable of estimating the effect on the assisting functions and on the individual cost categories of changes in the productive activity (e.g. productive activity 1 increases or decreases). For examle, what is the impact on assisting function 2 and on the headcount employed in this function if activity 1 increases, or decreases by 10%.

(c) indicates clearly what contribution an individual product (symbolised in the example as output from an activity) makes to recoup the costs of the assisting functions.


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