Essay About Cost Classification And Direct Relationship

Management Accounting
(1) Cost classification by traceability
Cost Object – anything of interest for which a cost is desired (i.e. the “focus”)
Cost Assignment – trace costs with a direct relationship; allocating costs with an indirect relationship
Direct Costs
Costs that can be
easily and conveniently traced to a cost object (e.g. product or department).
(very precise)
Example:
Cost of paint in the paint department of an automobile assembly plant.
Cost Object: the paint department.
Indirect costs
Costs that cannot be easily and conveniently traced to a cost object and must be allocated in order to be assigned to a cost object.
(small costs, lump them tgt & divide)
Example:
Cost of national advertising for an airline.
Cost Object: a particular flight
Cost of paint
Cost object: a particular car
Factors affecting Cost Classification
Cost Materiality
Availability of information-gathering technology
Better tech = more direct cost since it is easier to trace with lower tracing costs
Operational Design
(2) Cost Classification by Function
Manufacturing Costs
Direct Materials  raw materials (direct raw materials and indirect raw materials)
* direct raw materials can be conveniently traced to finished product
Direct Labour  personnel who work directly on manufactured products
Supervisors: don’t put the products together; not direct labour
Manufacturing Overheads  all other manufacturing costs
Indirect labour – personnel who do not work directly on the product
Indirect material:
Integral part of product