ACCT20001 Chap.2 Cost Objects, Tracing and Cost Classification
Cost Objects, Tracing and Cost Classification
This is the chapter every later chapter leans on. A cost object is anything the organisation wants a cost measured separately for, and the list the subject gives is deliberately wide: a product, a customer or a whole customer segment, a project, a single process, a stretch of the value chain, a division or department, and the organisation taken as a whole.
Because the object can be any of those, no cost item carries a fixed classification. Cost measurement then splits into recording, which organises items into accounts, and assignment, which attaches them to objects. Assignment has exactly two methods: tracing, which determines the exact quantity used and multiplies by price, and allocating, which estimates using an allocation base.
Whether an item is traced depends on two questions asked in series, physical feasibility and then economic feasibility, and a no to either produces an indirect cost. Two further classification schemes cut across the first. Fixed and variable describe what happens to a cost when volume changes, and the per-unit behaviour is the mirror image of the total behaviour, which is where most marks are lost.
The inventoriable label is not management's choice at all: an accounting standard decides which costs may sit inside an inventory valuation and wait there until the goods are sold. Learn the three schemes as three independent questions and most of the mid-semester test becomes routine.
What this chapter covers
- 01
What can be a cost object, and why the answer is deliberately broad
- 02
Recording against assignment, and why only the second one is hard
- 03
Tracing and allocating: the two methods, their accuracy and their cost
- 04
The two-question gate, and why a no on either produces an indirect cost
- 05
One salary, two cost objects, two correct answers
- 06
Direct and indirect lists for a manufacturing firm and for a service firm
- 07
Fixed and variable in total, and the reversed picture per unit
- 08
The relevant range, and why every behaviour claim needs a band
- 09
Mixed costs, and the wage that is fixed or variable depending on the contract
- 10
The inventory boundary, prime cost and conversion cost
Classify one item under all three schemes at once
- 1Direct or indirect: the showroom serves every benchtop sold, so no quantity of it can be measured against one unit, and the item fails the physical test. Indirect.
- 1Fixed or variable: the rent is set by a lease rather than by output, so its total does not move when more benchtops are made. Fixed inside the relevant range.
- 1Inventoriable or not: the cost was not incurred to bring inventory to its present location and condition, because selling happens after that point. Not inventoriable, so it is expensed as incurred.
Key terms
- Cost tracing
- Assigning a cost by measuring the exact quantity the object used and multiplying by the price per unit of quantity.
- Cost allocation
- Assigning an indirect cost by estimation, using an allocation base rather than a measured quantity.
- Physical feasibility
- Whether the exact amount of a cost item consumed by a cost object can be measured at all. A no here ends the tracing question.
- Economic feasibility
- Whether the benefit of tracing an item exceeds the cost of doing so. Large amounts and easy measurement both make tracing more worthwhile.
- Fixed cost
- A cost whose total holds steady while volume moves, although the amount attaching to each unit falls as output climbs.
- Variable cost
- A cost whose total rises and falls with volume, while the amount attaching to each unit stays put across a wide span of activity.
- Relevant range
- The band of output volume within which a cost's fixed or variable classification actually holds.
- Mixed cost
- A cost with a fixed component and a variable component in one line item, so its total starts above zero and then slopes upward.
- Inventoriable cost
- A cost the accounting standard permits inside an inventory valuation, so it is held back from the income statement until the goods are sold.
- Prime cost
- Direct materials plus direct labour, the direct manufacturing cost of a product.
- Conversion cost
- All manufacturing cost other than direct materials, so direct labour plus manufacturing overhead.
Cost Objects, Tracing and Cost Classification FAQ
Can the same cost be direct and indirect at the same time?
Yes, against different objects, and questions exploit it. A factory supervisor's salary is physically traceable to the factory and large enough to be worth tracing, so it is a direct cost of the factory. Against each unit of output it fails the physical test, because nobody can say how much supervision one unit consumed, so it becomes indirect. Nothing about the salary changed; the object did.
If total fixed cost never moves, why does anyone talk about fixed cost per unit?
Because reporting systems divide, and the division creates a number that behaves quite differently from the total. Spreading a constant total over more units makes the per-unit figure fall, which is arithmetic rather than a saving. The danger comes later, in break-even and short-term decisions, where treating that falling per-unit figure as though it were a variable cost produces confident and wrong recommendations.
Does a cost that varies with sales have to be part of inventory?
No. Behaviour and the inventory boundary are unrelated tests. Delivery to customers varies perfectly with volume and is still expensed as incurred, because it is a distribution cost incurred after the goods reached their saleable condition. Freight inward on raw materials is the mirror case: it is inventoriable precisely because it brings an input in.
Exam move
Drill this chapter as three separate questions rather than one impression. Take twenty cost items from any business, name a cost object, and answer direct or indirect, fixed or variable, inventoriable or not for each, writing one phrase of justification. Then change the cost object and do it again: the items that move are the ones the test will use.
Memorise the four behaviour statements as a block, because reversing the per-unit line is the single most common multiple-choice error in this half of the subject. Finally, get into the habit of writing within the relevant range after any fixed or variable claim in a written answer. It costs four words and it converts a statement an examiner can mark down into one they cannot.
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