Management Accounting

(1) Cost classification by traceability

Cost Object – anything of interest for which a cost is desired (i.e. the “focus”)

Cost Assignment – trace costs with a direct relationship; allocating costs with an indirect relationship

Direct Costs

• Costs that can be

easily and conveniently traced to a cost object (e.g. product or department).

(very precise)

• Example:

- Cost of paint in the paint department of an automobile assembly plant.

- Cost Object: the paint department. Indirect costs

• Costs that cannot be easily and conveniently traced to a cost object and must be allocated in order to be assigned to a cost object.

(small costs, lump them tgt & divide)

• Example:

- Cost of national advertising for an airline.

- Cost Object: a particular flight

- Cost of paint

- Cost object: a particular car

Factors affecting Cost Classification

1. Cost Materiality

2. Availability of information-gathering technology

- Better tech = more direct cost since it is easier to trace with lower tracing costs

3. Operational Design

(2) Cost Classification by Function

Manufacturing Costs

- Direct Materials  raw materials (direct raw materials and indirect raw materials)

* direct raw materials can be conveniently traced to finished product

- Direct Labour  personnel who work directly on manufactured products

o Supervisors: don’t put the products together; not direct labour

- Manufacturing Overheads  all other manufacturing costs

o Indirect labour – personnel who do not work directly on the product

o Indirect material:

1. Integral part of product