CHAPTER 2.pdf - CHAPTER 2 AN INTRODUCTION TO COST TERMS AND...

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2-1 CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES 2-1 Define cost object and give three examples. A cost object is 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. 2-2 Define direct costs and indirect costs. Direct 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 traced to a cost object, while indirect costs are allocated to a cost object. 2-3 Why do managers consider direct costs to be more accurate than indirect costs? Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions. 2-4 Name three factors that will affect the classification of a cost as direct or indirect. Factors affecting the classification of a cost as direct or indirect include the materiality of the cost in question available information-gathering technology design of operations 2-5 Define variable cost and fixed cost. Give an example of each. A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is sales commission paid as a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year) regardless of the number of units of product produced on the machine. 2-6 What is a cost driver? Give one example. A cost driver is a variable, such as the level of activity or volume that 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.