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Examples include a product, a service, a project, a customer, a brand category, an activity, and a department. 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. 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. An example is a sales commission that is 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. 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 motorvehicle assembly line. Costs are described as variable or fixed with respect to a particular relevant range. 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. Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution.

Service-sector companies provide services or intangible products to their customers, for example, legal advice or audits. Direct materials inventory. Direct materials in stock and awaiting use in the manufacturing process. Work-in-process inventory. Goods partially worked on but not yet completed. Also called work in progress. Finished goods inventory. Goods completed but not yet sold. Period costs are all costs in the income statement other than cost of goods sold.

These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods because there is not sufficient evidence to conclude that such benefit exists. Expensing these costs immediately best matches expenses to revenues.

Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object work in process and then finished goods in an economically feasible way.

Manufacturing overhead costs are all manufacturing costs that are related to the cost object work in process and then finished goods , but cannot be traced to that cost object in an economically feasible way. Prime costs are all direct manufacturing costs direct material and direct manufacturing labor. Conversion costs are all manufacturing costs other than direct material costs.

Computing and interpreting manufacturing unit costs. Based on total manuf.


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