Cost Accounting (14th Edition)

subcontractor payments. All materials are purchased through a
formal procurement process, which helps Nexamp carefully
manage and control material costs. Another key element of
direct costs is direct labor. Besides the actual wages paid to
employees, direct labor costs include costs of workers’
compensation insurance, health insurance, vacations and holidays,
sick days, and paid days off.
Indirect costs of a job are allocated to each project. These
include cost of supervisory labor, company-owned equipment,
construction supplies, and safety equipment. Finally,
Nexamp allocates general and administrative costs, such
as office rent, utilities, and general insurance to
each job.
Just like at Nexamp, managers at Nissan need to know how
much it costs to manufacture its new Leaf electric car, and
managers at Ernst & Young need to know what it costs to audit
Whole Foods, the organic grocer. Knowing the costs and profitability
of jobs helps managers pursue their business strategies, develop
pricing plans, and meet external reporting requirements. Of course,
when making decisions, managers combine cost information with
noncost information, such as personal observations of operations,
and nonfinancial performance measures, such as quality and
customer satisfaction.
Building-Block Concepts of Costing Systems
Before we begin our discussion of costing systems, let’s review Chapter 2’s cost-related
terms and introduce the new terms that we will need for our primary discussion.
1. Cost object—anything for which a measurement of costs is desired—for example, a
product, such as an iMac computer, or a service, such as the cost of repairing an
iMac computer.
2. Direct costs of a cost object—costs related to a particular cost object that can be
traced to that cost object in an economically feasible (cost-effective) way—for example
the cost of purchasing the main computer board or the cost of parts used to make
an iMac computer.
3. Indirect costs of a cost object—costs related to a particular cost object that cannot be
traced to that cost object in an economically feasible (cost-effective) way—for example,
the costs of supervisors who oversee multiple products, one of which is the iMac,
or the rent paid for the repair facility that repairs many different Apple computer
products besides the iMac. Indirect costs are allocated to the cost object using a costallocation
method.
Learning
Objective 1
Describe the buildingblock
concepts of
costing systems
. . . the building blocks
are cost object, direct
costs, indirect costs,
cost pools, and costallocation
bases
Recall that cost assignment is a general term for assigning costs, whether direct or indirect,
to a cost object. Cost tracing is a specific term for assigning direct costs; cost allocation