Question

define a cost object, direct costs and indirect costs and explain variable costs and fixed costs (in your own words)

Answer 1

Cost object is setting up costs or assigning cost particullarly to a department, production unit or customers.So as to determine the Total costs for that particular unit and forecasting the budget for that unit.

Direct cost are the costs which are directly related to the production activities and are directly attributable to the cost object. These include raw material cost, labor cost involved in production and the overhead cost like factory power and electricity.These cost change with change in volume of production

Indirect cost are the cost which are not directly related to production activities and are not directly atrributable to cost object.These costs include Administrative overhead indirect labor cost like Cost of Office workers etc.These cost can be fixed or change with change in volume of production.

Variable cost is the cost which changes with change in volume of production. These cost are relevant for management decision making to determine the acceptance of a project. Examples of variable cost is Direct material cost which changes with change in each unit produced.

Fixed cost are the cost which remains constant.These cost does not change with the change in volume of production and remain. same upto a level of activity. These cost are irrelevant for decision making as have already been incurred.Example is Office rent which remains same.