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Cost-Tracing: the assignment of direct costs to Cost allocation: the assigning of indirect costs
the particular cost object. to the particular cost object.
……………………………….. ……………………………..
Change in total in proportion to changes in Do not change in total for a given time period
the related level of total activity or volume. despite wide changes in the related level of
total activity or volume.
Relevant range: the band of the level of activity or volume on which a specific relationship
between the level of activity or volume and the cost in question is valid.
A cost driver: a factor that causally affects costs (over a given time span).
Ex: The cost driver of variable costs is the level of volume whose change causes the costs to
change proportionately.
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Direct cost Indirect cost
Variable Cost object: Assembled car. Cost object: Assembled car.
= Total Cost
cost
Example: Tires used in Example: Power costs where power
assembly of car. usage is metered only to the plant.
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Manufacturing stock
Manufacturing stock
↓ ↓ ↓
Opening direct materials stock. Opening WIP stock. Opening finished goods stock.
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Direct: materials Indirect
costs Manufacturing manufacturing
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costs costs
manufacturing overhead
costs/ factory overhead
costs.
Direct
Manufacturing labour
costs.
Manufacturing Cost
- Direct material costs (costs of all materials that eventually become part of the cost
object).
+ Direct manufacturing labour costs (all manufacturing labour that can be traced to the
cost object in an economically feasible way).
+ Indirect manufacturing costs (manufacturing cost that is part of the cost object, but
that cannot be traced to that cost object in an economically feasible way).
PV