COST OBJECTS

1
COST OBJECTS COST TRACING

• Principles of Accounting II
• AC 2102 - Fall Semester, 1999

2
Costing Products, Services Other Cost Objects

• Assigning (or attaching) costs to products,
  services other cost objects is one of the
  principal purposes of managerial accounting

3
COST

• Cost is the cash or cash-equivalent sacrificed
  for goods and services that are expected to bring
  a current or future benefit to the organization
• A cash-equivalent sacrifice is one where a
  company pays for a good or service with a noncash
  resource
• example trade in of an old truck for a new
  truck

4
Clarifying The Term Cost

• The term cost simply refers to the making of a
  sacrifice
• Without further clarification it is difficult to
  discern the particular nature of the cost (or
  sacrifice) being considered or discussed
• An adjective before the word cost is necessary to
  clarify the nature of each cost
• In accounting the terms cost and expense do
  not have the same meaning

5
Some Key Types of CostsWhich We Will Study In
This Course

• Discretionary Cost
• Committed Cost
• Allocated Cost
• Sunk Cost
• Opportunity Cost
• Incremental Cost
• Downstream Cost
• Upstream Cost
• Relevant Cost

• Variable Cost
• Fixed Cost
• Semivariable Cost
• Direct (or Traceable) Cost
• Indirect Cost
• Expired Cost (which is an Expense)
• Capitalized Cost (which is an asset)

6
Cost vs. Expense

• A cost is simply the incurring of a sacrifice for
  goods and services that are expected to bring a
  benefit to the organization in the current or
  future periods
• Costs can be reflected on either the income
  statement (as an expense) or on the balance sheet
  (as an asset)
• Expenses are costs that assisted in generating
  the revenues of the current period
• Assets are unexpired costs, i.e., costs that will
  provide future benefits

7
Cost Objects

• Any item for which costs are being measured
• the thing or process for which we are trying
  to determine its cost
• Common cost objects
• Products, services, customers, departments,
  operations, projects, activities
• In recent years, activities have emerged as
  important cost objects

8
Activities

• An activity is a basic unit of work perfomed
  within an organization
• An activity is described by an action verb
• Activities play a prominent role in assigning
  costs to cost objects
• Examples of activities
• unloading trucks, setting up a machine, typing a
  letter, billing customers, moving materials,
  inspecting product

9
Accuracy of Assignments

• Assigning costs accurately to cost objects is
  crucial
• Accurate refers to the reasonableness and logic
  of the cost assignment methods used
• There are many ways to determine the cost of cost
  objects
• No particular way of costing can generally be
  specified as determining the true cost
• Selection of which costs to include, assignment
  methods, cost traceabiltiy, and the purpose of
  the costing will all impact the calculated figure

10
Traceability of Costs (1)

• Costs are directly or indirectly associated with
  cost objects
• Direct costs are those costs that can be easily
  and accurately traced to cost objects
• Easily traced means that the costs can be
  assigned in an economically feasible way
• Accurately traced means that the costs are
  assigned using a cause-and-effect- relationship
• Indirect costs are costs that cannot be easily
  traced to cost objects

11
Traceability of Costs (2)

• The more costs that can be assigned to the cost
  object, the greater the accuracy of the cost
  assignments
• Establishing traceability is a key element in
  building accurate cost assignments
• A particular cost can be a direct cost to one
  cost object and an indirect costs to another cost
  object
• Example Cost of utilities
• direct cost to entire factory
• indirect cost to one of the products manufactured

12
(No Transcript)