The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.
| Decision | Guidelines |
|---|---|
| A cost object is anything for which a manager needs a separate measurement of cost. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department. |
| A direct cost is any cost that is directly related to a particular cost object and that can easily and unambiguously be traced to that cost object. An indirect cost is any cost that is related to a particular cost object but that cannot easily and unambiguously be traced to it. The same cost can be direct with respect to one cost object and indirect with respect to another cost object. This text uses cost tracing to describe the assignment of direct costs to a cost object and cost allocation to describe the assignment of indirect costs to a cost object. |
| A variable cost changes in its total level in proportion to changes in the volume, or number of units achieved, of the cost object. A fixed cost remains unchanged in its total level for a given time period, despite wide changes in the volume, or number of units achieved, of the cost object. |
| In general, focus on total costs, not unit costs. When making total cost estimates, think of variable costs as an amount per unit and fixed costs as a total amount. Interpret the unit cost of a cost object cautiously when it includes a fixed-cost component. |
| Inventoriable costs are all costs of a product that a company regards as an asset in the accounting period in which they are incurred and which become cost of goods sold in the accounting period in which the product is sold. Period costs are expensed in the accounting period in which they are incurred and are all of the costs in an income statement other than cost of goods sold. |
| In manufacturing settings, inventoriable costs flow through work in process and finished-goods accounts, and are expensed as cost of goods sold when the products are sold. Period costs are expensed as they are incurred. In merchandising settings, only the cost of merchandise is treated as inventoriable; all other costs are treated as period costs. |
| Managers may assign different costs to the same cost object depending on the specific situation, purpose, or question that management is trying to address. For example, for external reporting purposes in a manufacturing company, the inventoriable cost of a product includes only manufacturing costs. In contrast, costs from all business functions of the value chain are often assigned to a product for pricing and product-mix decisions. |
| Three key features of cost accounting and cost management are (1) calculating the cost of products, services, and other cost objects; (2) obtaining information for planning and control and performance evaluation; and (3) analyzing relevant information for making decisions. |