BASIC COST MANAGEMENT CONCEPTS
QUESTIONS FOR WRITING AND DISCUSSION
A cost object is any item for which costs are
measured and assigned, including such
things as products, plants, projects, depart-
ments, customers, and activities.
An activity is a basic unit of work performed
within an organization. Examples include
materials handling, inspection, purchasing,
billing, and maintenance.
Direct costs are costs that can be easily and
accurately traced to a cost object. An indir-
ect cost is a cost that cannot be easily
traced to cost objects.
Traceability is the ability to assign a cost dir-
ectly to a cost object in an economically
feasible way using a causal relationship.
Allocation is the assignment of indirect costs
to cost objects based on convenience or as-
Driver tracing is the use of drivers to trace
costs to cost objects. Often, this means that
costs are first traced to activities using re-
source drivers and then to cost objects us-
ing activity drivers.
Tangible products are goods that are made
by converting raw materials through the use
of labor and capital inputs.
A service is a task or activity performed for
a customer or an activity performed by a
customer using an organization’s products
or facilities. Services differ from tangible
products on three important dimensions: in-
tangibility, perishability, and inseparability.
Intangibility means that buyers of services
cannot see, feel, taste, or hear a service be-
fore it is bought. Perishability means that
services cannot be stored. Inseparability
means that producers of services and buy-
ers of services must be in direct contact (not
true for tangible products).
Three examples of product cost definitions
are value-chain, operating, and traditional
definitions. The value-chain definition in-
cludes cost assignments for research and
development, production, marketing, and
customer service (all value-chain activities).
Operational product costs include all costs
except for research and development. Tradi-
tional product costs include only production
costs. Different cost definitions are needed
because they serve different managerial ob-
The three cost elements are direct materi-
als, direct labor, and overhead.
The income statement for a service firm
does not need a supporting cost of goods
manufactured schedule. Since services can-
not be stored, the cost of services produced
equals the cost of services sold (not neces-
sarily true for a manufacturing firm).