Is a cost that can be easily and conveniently traced to a particular cost object?
Cost Terms, Concepts, and Classifications Show Learning Objectives
Chapter Overview A. General Theme. Costs can be classified in a number of ways—depending on the purpose of the classification. For example, classification of costs for purposes of determining inventory valuations and cost of goods sold for external reports differs from the classification of costs that would be carried out to aid decision-making. It is important to note that the classifications of costs are not mutually exclusive. That is, a particular cost may be classified in many different ways—depending on the purpose of the classification. B. Cost Classifications for Preparing External Financial Statements. This section of the chapter focuses on the problem of valuing inventories and determining cost of goods sold for external financial reports. Before beginning this discussion, you may want to explain the difference between a manufacturing and a merchandising company. Manufacturing companies convert raw materials into a product. The company then sells that product either to other companies or, less commonly, directly to individuals. “Manufacturing” includes restaurants, movie studios, and other service-type companies as well as the more obvious examples of manufacturing such as automobile and clothing production. Merchandising companies, by contrast, buy finished products and resell the products to customers. Valuing inventories and determining cost of goods sold is simple in a merchandising company, but is difficult in a manufacturing company. For that reason, we concentrate on manufacturing in this section of the chapter.
C. Cost Classifications to Describe Cost Behavior. Managers often need to be able to predict how costs will change in response to changes in activity. The activity might be the output of goods or services or it might be some measure of activity internal to the company such as the number of purchase orders processed during a period. In this chapter, nearly all of the illustrations assume that the activity is the output of goods or services. In later chapters, other measures of activity will be introduced. While there are other ways to classify costs according to how they react to changes in activity, in this chapter we introduce the simple variable and fixed classifications. A variable cost is constant per unit of activity but changes in total as the activity level rises and falls. A fixed cost is constant in total for changes in activity within the relevant range. (Just about any cost will change if there is a big enough change in activity. Fixed costs do not change for changes in activity that fall within the “relevant range.”) When expressed on a per unit basis, a fixed cost is inversely related to activity—the per unit cost decreases when activity rises and increases when activity falls. There is some controversy concerning the proper definition of the “relevant range.” Some refer to the relevant range as the range of activity within which the company usually operates. We refer to the relevant range as the range of activity within which the assumptions about variable and fixed costs are valid. Either definition could be used—our choice was dictated by our desire to highlight the notion that fixed costs can change if the level of activity changes enough. D. Cost Classifications for Assigning Costs. Managers often want costs to be assigned to “cost objects” such as products, customers, departments, etc. for pricing or other purposes. A direct cost is a cost that can be conveniently and easily traced to a particular cost object. Indirect costs are everything else. A cost would be considered indirect for one of two reasons: either it is impractical or it is impossible to trace the cost to the cost object.
E. Cost Classifications for Decision-Making. Every decision involves choosing from among at least two alternatives. Only those costs and benefits that differ between alternatives are relevant in making the selection. This concept is explored in greater detail in the chapter on relevant costs. However, decision-making contexts crop up from time to time in the text before that chapter, so it is a good idea to familiarize students with relevant cost concepts.
What cost is easily traceable to cost a object?Direct Costs
A direct cost includes raw materials, labor, and expense or distribution costs associated with producing a product. The cost can easily be traced to a product, department, or project. For example, Ford Motor Company (F) manufactures cars and trucks. A plant worker spends eight hours building a car.
Can be easily traced to a particular cost object?direct cost. Direct costs are costs that can be directly traced to a particular cost object.
Which of the following costs can not be easily and conveniently be traced to a cost object?Indirect Cost: An indirect cost is a cost that cannot be easily and conveniently traced to the particular cost object under consideration, for examples, indirect materials, indirect labor etc.
What are the 4 types of cost?Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.
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