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Assigning Costs to Cost Objects
Costs can be assigned to cost objects in a number of ways. Relatively speaking, are more accurate, while others are simpler. The choice of a method depends on a number of factors, such as the need for accuracy. The notion of accuracy is a relative concept and has to do with the reasonableness and logic of the cost assignment methods used. The objective is to measure and assign costs as well as possible, given management objectives. The second method is more accurate, but also more work. Which method you choose will depend on how important it is to you to assign the specific meal costs to each individual. It is the same way in accounting. There are a number of ways to assign costs to cost objects. Some methods are quick and easy, but may be relatively inaccurate. Other methods are much more accurate, but also much more work (in business, more work equals more expense).
Tracing Direct Costs
Direct costs are those costs that can be easily and accurately traced to a cost object. When we say that a cost is easy to trace, we often mean that relationship between the cost and the object can be physically observed and is easy to track. The more costs that can be traced to the object, the more accurate are the cost assignments. Indirect costs are costs that cannot be accurately traced to a cost object.
Assigning Indirect Costs
This costs cannot be traced to cost objects, it is still important to assign them. This assignment usually is accomplished using allocation. Allocation means that an indirect cost is assigned to a cost object using a reasonable and convenient method. Since no clearly observable causal relationship exists, allocating indirect costs is based on convenience or some assumed causal linkage. For example, consider the cost of heating and lighting a plant in which five products are manufactured. How can we assign the utility cost to these five products? It is difficult to see any causal relationship between utility costs and each unit of product manufactured. Therefore, a convenient way to allocate this cost is to assign it in proportion to the direct labor hours used by each product. This method is relatively easy and accomplishes the