Question

Define and illustrate a cost object.

Distinguish between direct costs and indirect costs.

Explain variable and fixed costs.

Interpret unit costs cautiously.

Distinguish inventoriable costs from period costs.

Illustrate the flow of inventoriable and period costs.

Explain why product costs are computed in different ways for different purposes.

Describe a framework for cost accounting and cost management.

Answer 1

A cost object is often a product or department for which costs are accumulated or measured. For example, a product is the cost object for direct materials, direct labor and manufacturing overhead. A cost object can also be a customer, a machine, a group of machines, a group of employees, etc.

The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects but indirect costs cannot be traced to specific cost objects. Direct costs tend to be variable costs, while indirect costs are more likely to be either fixed costs or period 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.

Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc. Whereas Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range. Fixed costs often include rent, buildings, machinery, etc.

A unit cost is a total expenditure incurred by a company to produce, store, and sell one unit of a particular product or service. This accounting measure includes all of the fixed and variable costs associated with the production of a good or service.

The product costs of direct materials, direct labor, and manufacturing overhead are "inventoriable" costs, since these are the necessary costs of manufacturing the products. Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration. The period costs are reported as expenses in the accounting period in which they 1) best match with revenues, 2) when they expire, or 3) in the current accounting period.

Inventoriable and period costs are also a type of classifications of costs. Inventoriable costs can be defined as costs which become part of inventories such as raw material, work in progress and finished goods inventory present in the balance sheet of any business. On the other hand, period costs are all other costs that are not inventoriable costs. Period costs are those costs which are incurred and expensed in Profit and Loss Statement in the period they are incurred.