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COST OBJECTS &

COST TRACING

Principles of Accounting IIAC 2102 - Fall Semester, 1999

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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

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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

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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

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Some Key Types of CostsWhich We Will Study In This Course

• Variable Cost• Fixed Cost• Semivariable Cost• Direct (or Traceable)

Cost• Indirect Cost• Expired Cost (which

is an Expense)• Capitalized Cost (which is

an asset)

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

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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

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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

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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

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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

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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

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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

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