cost12ism_02 - CHAPTER 2 AN INTRODUCTION TO COST TERMS AND...

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2-1 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. 2-3Managers believe that costs that are traced to a particular cost object are more accurately assigned to that cost object than are 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. 2-4Factors 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, and contractual arrangements.2-5A variable costchanges in total in proportion to changes in the related level of total activity or volume. An example is a sales commission that is a percentage of each sales revenue dollar. A fixed costremains 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). 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. 2-7The relevant rangeis the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range. 2-8A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.
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