When costs can be traced to a particular cost object in an economically feasible way the cost is a direct cost?

The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects. A cost object is something for which a cost is compiled, such as a product, service, customer, project, or activity. These costs are usually only classified as direct or indirect costs if they are for production activities, not for administrative activities (which are considered period costs).

The concept is critical when determining the cost of a specific product or activity, since direct costs are always used to compile the cost of something, while indirect costs may not be assigned to such a cost analysis. It can be too difficult to derive a cost-effective methodology for the assignment of indirect costs; the result is that many of these costs are considered part of corporate overhead or production overhead, which will exist even if a specific product is not created or an activity does not occur.

Direct costs tend to be variable costs, while indirect costs are more likely to be either fixed costs or period costs.

Using Direct Costs and Indirect Costs in Pricing

At a minimum, direct costs should always be included in the derivation of a product’s price, since the established price must always equal or exceed its direct cost; otherwise, every sale will generate a loss. Pricing based just on direct costs makes the most sense in situations where there is an opportunity to sell a few extra units on a one-time sale with excess production capacity. Indirect costs should also be included in the derivation of a product’s price when setting long-term rates, where product sales must cover both direct and indirect costs.

Examples of Direct Costs and Indirect Costs

Examples of direct costs are direct labor, direct materials, commissions, piece rate wages, and manufacturing supplies. Examples of indirect costs are production supervision salaries, quality control costs, insurance, and depreciation.

3) When costs can be traced to a particular cost object in an economically feasible way, the cost is a:A) direct costB) indirect costC) allocated costD) budgeted cost

4) Which of the following statements about the direct/indirect cost classification is true?

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12) Indirect manufacturing costs ________.

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13) Which of the following is true of indirect costs?

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14) Which of the following statements is true?A) A direct cost of one cost object will always be a direct cost of another cost object.B) Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs.C) All fixed costs are indirect costs.D) All direct costs are variable costs.

15) Which of the following statements is true of direct costs?

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CHAPTER 2

AN INTRODUCTION TO COST TERMS AND PURPOSES

2-1Define cost object and give three examples.

A 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.

2-2Define 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.

2-3Why 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.

2-4Name 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

2-5Define 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.

2-6What 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.

For example, the number of vehicles assembled is a driver of the costs of steering wheels on a

motor-vehicle assembly line.

2-7What is the relevant range? What role does the relevant-range concept play in explaining

2-1

When costs can be traced to a particular cost object in an economically feasible way the cost is a quizlet?

Why are indirect costs not directly traced to cost objects in the same way as direct costs?

Can be easily traced to a particular cost object?

What is direct and indirect cost?