Quiz 3: Basic Cost Management Concepts
Cost: Cost refers to the expenditure incurred to manufacture product or provide a service. Since a number of cost are incurred during production process these costs are required to be bifurcated based on their usage, frequency etc. Costs are primarily divided into direct cost and indirect cost. Cost Allocation and cost assignment are techniques of dividing costs to the products and services. Difference between cost allocation and cost assignment: 1. Cost assignment is the process of assigning cost to the products based on cost pools and cost objects. Whereas Cost allocation is the process if allocating cost to the product using cost drivers. 2. Cost assignment is a complete process and Cost allocation is a part of cost assignment. 3. Cost Assignment is used for direct cost because they can be easily assigned to the products whereas cost allocation is used for indirect cost because they are required to the allocated on the basis of pre-determined cost drivers. 4. Cost assignment is easy since cost is directly traceable, but cost allocation requires calculations and logic to arrive at the correct allocation base for the cost.
Cost: Cost refers to the expenditure incurred to manufacture product or provide a service. Since a number of cost are incurred during production process these costs are required to be bifurcated based on their usage, frequency etc. Costs are primarily divided into direct cost and indirect cost. Difference between direct and indirect cost: 1. Direct costs are directly traceable to the product whereas indirect costs are not directly traceable to the product. 2. Direct cost varies directly with the production i.e. if these costs will not be incurred if production does not happen. Indirect cost will be incurred even if production does not happen. 3. Sum of all direct costs is known as prime cost and sum of all indirect costs is known as overhead cost. 4. Direct costs are further sub divided into direct cost , direct labor and direct expenses whereas indirect cost are further sub divided into indirect material, Indirect labor and other overhead. Example: Example of direct costs is raw material, Wages paid to labor, commissions, piece rate wages etc. Example of Indirect costs is indirect materials, supervisor's salary, insurance, depreciation etc.
A manufacturer incurs several costs during the production process. These costs are bifurcated into direct and indirect cost. Direct Cost: Direct Costs are directly traceable to the product. Hence, it can be said that these expenses are incurred exclusively for the product and will not be incurred in case production does not happen. Variable cost: Variable cost varies directly with the level of output. i.e. these expenses will increase when the production increase and will decrease if production decreases. Generally direct cost is variable cost because these are incurred for the product directly. For example direct material will vary directly with the proportion of output. However, it is not always true that direct cost will be variable cost , for example if rent is paid for factory exclusively used for production than rent will be a fixed cost and a direct cost as well. Another example will be supervisor's salary whose services are required for the product only. Hence, "All direct cost is variable" is not true.