In order to keep track during the product costing process, the costs that share a certain type, department, or responsibility are grouped together into cost pools. Each cost pool, in turn, has a particular cost driver that determines the total cost depending on the level of activity or volume used. Finally, a cost object “can be a product, service, process or any item which management requires cost information”.
The total cost of a product consists of two different cost classifications; fixed and variable costs. Fixed costs do not vary with increases or decreases in activity or volume levels. Examples of fixed costs would be facility costs such as property taxes and utilities as well as support activities like office supplies expenses. Variable costs vary in relation with the change in the cost driver of that cost pool. These costs include direct labor and direct materials.
When it comes to tying the costs to their cost pools or cost objects, costs can either be assigned or allocated, depending on their nature. Direct costs are easily traced or assigned to their... [continues]
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