Basic Cost Management Concepts

Basic Cost Management Concepts

1. What is a cost object? Give some examples

A cost object is any item, such as products, customers, departments, projects, and so on, for which costs are measured and assigned.

Some examples are

• A bicycle

• An individual fast food franchise

• The produce department of a grocery store

2. What is an activity? Give some examples of activities within a manufacturing firm.

An activity is an aggregation of actions within an organization useful to managers for purposes of planning, controlling, and decision making.

Some examples are

• Setting up equipment for production

• Moving materials and goods

• Purchasing parts

• Designing products

• Inspecting products

3. What is a direct cost? An indirect cost?

Indirect costs are costs that cannot be traced easily and accurately to a cost object. Direct costs are those costs that can be traced easily and accurately to a cost object.

4. What does traceability mean?

Traceability is simply the ability to assign a cost directly to a cost object in an economically feasible way by means of a causal relationship.

5. What is allocation?

Allocation is the assignment of indirect costs to cost objects.

6. What is a tangible product?

Tangible products are goods produced by converting raw materials through the use of labor and capital inputs such as plant, land, and machinery.

7. What is a service? Explain how services differ from tangible products.

Services are tasks or activities performed for a customer or an activity performed by a customer using an organization’s products or facilities.

Services differ from tangible products on three important dimensions:

• Intangibility that means the buyers of services cannot see, feel, hear, or taste a service before it is bought.

• Perishability that means that services cannot be stored.

• Inseparability that means that producers of services and buyers of services must usually be in direct contact for an exchange

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