CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES 2-1A cost objectis anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department. 2-2Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way. Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way. Cost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are tracedto a cost object while indirect costs are allocatedto a cost object. 2-6A cost driveris a variable, such as the level of activity or volume, which causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line. 2.11Inventoriable costsare all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. These costs are included in work-in-process and finished goods inventory (they are “inventoried”) to accumulate the costs of creating these assets. Period costsare all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues. 2-15A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include •pricing and product mix decisions, •contracting with government agencies, and •preparing financial statements for external reporting under generally accepted accounting principles.
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