At present time, taking into account the state of the business sphere development, the notion of the cost elements can be identified as indirect costs which are not connected with direct materials and jobs. All overhead cost elements in the sphere of economics and business are divided into:
- Mixed costs;
- Variable expenses;
- Fixed costs.
This type of classification is concentrated on the affecting production rate changes, though it is not considered to be generally accepted and can differ in various spheres of industry.
Overhead cost elements include such general types of expenses as indirect materials and job costs, expenses for repair, insurance, supplies, etc. In comparison with indirect costs, direct ones are always the result of completed work. Overhead costs are generally subdivided into the following categories: administrative, selling overhead, and company one. As one can see all these types are not connected with any product manufacturing and services. For example, selling overhead is completely interlaced with marketing and distribution of different services. As to administrative overhead cost elements, they refer to the general running of the business as, for example, the indirect work of administrators involved in the production department.
The next type of cost element is variable expenses. To be completely aware of the meaning of the notion one can define it as expenses that are closely connected with the development of the activity level and vary proportionately to them. To illustrate the notion one can consider direct job and materials such as goods cost and freight out. There is one more definition for this kind of cost element which runs like expenses that do not change and remain constant at any rate of activity development.
The third kind of cost elements classification is basically concentrated on the fixed costs. This type of cost remains constant and fixed in the process of some changes in the activity rate. As an example, it is important to note rent, property taxes, and all kinds of insurance. The variation of these cost elements is quite possible; when the volume of the activity grows, the costs decrease.
Mixed costs elements contain two previous types of costs such as variable and fixed costs. They also rise if the level of activity increase but this process is not completely proportional. According to some methods of cost researching, the appearance of cost elements can be observed only on the low or high level of the activation process. There are certain differences between the cost elements mentioned above. The only type of cost which influences the activity level and its changes is variable cost elements.
There exist two main assumptions covering the manufacturing accounting of overhead costs:
- To satisfy the purposes of income measurement one use a fixed-variable assumption;
- Unit cost elements which never change with the volume of the activity level;
One of the most difficult processes is that of fixed-variable elements separation, but when it is fulfilled both fixed and variable costs can function separately in a particular service, such as actual services are connected with variable cost elements and fixed costs are associated with the fulfillment of the particular basis.
All these types of costs are an integral part of manufacturing and activity processes as they are used in organizing and examining different spheres of business structures. To illustrate it in more detail one should pay attention to the Riordan Manufacturing Virtual Organizations.
Riordan Manufacturing is the gigantic leader in the sphere of plastic injection cooperating with the plants from the whole world, such as China, Michigan, and Georgia. The major sphere which is considered to be the basic one is e-commerce; it is closely connected with the development of a company and its place on the global market. According to some Chinese accountings, the economic increase caused by computer technology development has far outweighed the rate of US economy manufacturing. This kind of business is widely used and developed in order to raise the level of sales efficiency and market productivity. It is aimed at strengthening customer relationships and providing a high rate of export worldwide. Computer technologies continue to influence and control the activities and structure of all kinds of industries. The sphere of economics is under the strong influence of technological development and completely depends on it. Speaking about Riordan Manufacturing it is controlled by the great number of enterprises owned by Riordan (about 1000 companies).
Let us take a view on the Microsoft Office Project developed by the Microsoft Company taking into account the Riordan Manufacturing Virtual Organizations. The project under analysis supports fixed costs that never change in the process of task duration of the programs and do not depend on the number of necessary tasks or amount of performed work. These cost elements are inserted into the total costs in order to get a fixed amount within the particular project. One has an opportunity to make use of the fixed costs in the task of the project where resource costs are used as well. Fixed costs form a complete vision of the cost amount within the particular task. Resource costs are also important in the organization of the project; they are used as a kind of resource necessary for the project and are inserted in the task. Cost elements can be used either at the beginning or final stages of the project. Material costs which are concentrated on the definite unite price help to form and calculate the percentage level of the existing units.
Cost elements are predominantly reflected in the financial reporting of balance sheet-based documents. This model shows the project reality as a whole and underlines its essential features. All kinds of costs are described there in order to realize the total state of the analyzed project and understand its negative and positive parts.
The analysis of the cost elements and their peculiarities provided a complete view of the costs types and cases when they should be used. Riordan Manufacturing has been still developing as a major company of e-commerce. It merely deals with international law and electronic business. The main aim of these virtual organizations is to provide the whole world with their projects in order to involve new customers in the sphere of their activities. Riordan Manufacturing seemed to change the whole culture and turned it into a group-based culture. The virtual organization brought unexpected changes to the structure and manufacturing processes of the business sphere. Riordan managed to create a major influential and significant set of organizations which are the basis for creating new projects and promoting them all around the world.
References
Meigs, Robert F., & Meigs, Walter. (2000) “Overhead Can Kill You.” Accounting: The Basis for Business Decisions. 8th ed. New York.
Waddell, Scott (1999). International Business Legal Issues: Riordan Manufacturing. University of Phoenix: Business Law.
Yoav, Vardi & Ely, Weitz. (2004). “Misbehavior in Organizations: Theory, Research, and Management.” Lawrence Erlbaum Associates, 337 pgs.
Gray, & Larson. (2006) “Project Management: The Managerial Process”.
Cleland, & Ireland. (2004) “Project Manager’s Portable Handbook”.