The Cost Function: Notes

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Chapter 2 – The Cost Function

* A cost object is a thing or activity for which we measure costs. Cost objects include such things as individual products, product lines, projects, customers, departments, and even the entire company. * Direct cost: a cost that can be directly traced to a cost object and is incurred for the benefit of a particular cost object * Indirect cost: a cost that is incurred for the benefit of more than one cost object and therefore cannot be easily and economically traced to a particular cost object * Prime costs: direct materials and direct labour

* Conversion costs: direct labour and manufacturing overhead

Classifications| Applications| Cost Terms|
Relevance| Decision-making| Relevant cost vs. irrelevant cost| Behaviour| Costs estimation| Fixed cost vs. variable cost| Traceability| Costs assignment| Direct cost vs. indirect cost| Function| Cost determination| Manufacturing cost vs. non-manufacturing cost| Controllability| Performance evaluation| Controllable cost vs. uncontrollable cost|

* Traceability: the ability to trace in an economically feasible way by means of a cause and effect relationship * Tracing: is the actual assignment of costs to a cost object using an observable measure of the resources consuming the cost object * Direct tracing: is the process of identifying and assigning costs that are specifically or physically associated with a cost object to that cost object. * Costs that are physically associated with a product (Direct costs) are the easiest to trace, since we can visually observe and measure the relationship * Driver Tracing: is the use of drivers to assign costs to cost objects. This is less exact than direct tracing * Drivers: are observable casual factors that measure a cost object’s resource consumption * Cost allocation – costs that cannot be easily traced (i.e. some indirect costs) are “allocated”. This is the least accurate method of...
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