![]() ![]() ![]() Examples of step-fixed costs are the costs for certain clerical tasks, order filling, and other administrative tasks. However, total costs increase by a constant amount at set intervals. Costs remain fixed over narrow ranges of the cost driver. Fixed costs are the portion of total cost which remains constant as the cost driver changes.Ī step-fixed cost varies with the cost driver, but in discrete steps. Variable costs are those for which total cost changes with each change in the cost driver. Indirect costs include the machinery, plant and other labor necessary to manufacture the product, but which is not directly traceable to the product, such as labor for inspection and supervision.Īll direct costs are variable by definition since they can be directly traced to the cost object, and thus must vary with the cost driver.Īll fixed costs must be indirect, since the increase in the cost driver or volume of output does not affect the level of fixed cost.Ī cost driver is any activity that has the effect of changing the level of total cost. Direct costs for a manufactured product include the materials (called direct materials) which are part of the product and the labor (called direct labor) which is used to assemble the product. ![]() Indirect costs cannot be traced to each cost object. Cost allocation uses cost drivers to assign the cost.ĭirect costs can be physically identified with and/or traced to the cost object because there is a direct causal link between them. When there is an indirect link between the cost and the cost pool or cost object, then the management accountant uses cost allocation. When there is a direct and traceable link between the cost and the cost pool or cost object, then the management accountant traces that cost to the cost pool or cost object. Examples of Activity Cost DriversĮxamples of activity cost drivers are direct labor hours, square footage used, the number of customer change orders, and the number of machine setups required.Chapter 3 - Basic Cost Management ConceptsĬHAPTER 3: BASIC COST MANAGEMENT CONCEPTS QUESTIONS 3-1Ĭost assignment refers to the general case of assigning costs to cost pools or cost objects. It makes little sense to set up a group of activity cost drivers if management does not act on the resulting information. Instead, they are used in management information systems.Īctivity cost drivers should only be used when the cost of collecting the cost driver information is less than the benefits to be gained from doing so. ![]() Activity cost drivers are not required in the formulation of financial accounting information. When a management team has a comprehensive knowledge of activity cost drivers, it can make better decisions that enhance the profitability of an organization. There may be more than one activity cost driver that initiates the incurrence of a variable expense. A cost driver causes variable expenses to be incurred. An activity cost driver is an action that triggers the incurrence of a cost. ![]()
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