cost assignment elements

Module 5: Job Order Costing

Introduction to accumulating and assigning costs, what you will learn to do: assign costs to jobs.

Financial and managerial accountants record costs of production in an account called Work in Process. The total of these direct materials, direct labor, and factory overhead costs equal the cost of producing the item.

In order to understand the accounting process, here is a quick review of how financial accountants record transactions:

Let’s take as simple an example as possible. Jackie Ma has decided to make high-end custom skateboards. She starts her business on July 1 by filing the proper forms with the state and then opening a checking account in the name of her new business, MaBoards. She transfers $150,000 from her retirement account into the business account and records it in a journal as follows:

For purposes of this ongoing example, we’ll ignore pennies and dollar signs, and we’ll also ignore selling, general, and administrative costs.

After Jackie writes the journal entry, she posts it to a ledger that currently has only two accounts: Checking Account, and Owner’s Capital.

Debits are entries on the left side of the account, and credits are entries on the right side.

Here is a quick review of debits and credits:

You can view the transcript for “Colin Dodds – Debit Credit Theory (Accounting Rap Song)” here (opens in new window) .

Also, this system of debits and credits is based on the following accounting equation:

Assets = Liabilities + Equity.

• Assets are resources that the company owns
• Liabilities are debts
• Equity is the amount of assets left over after all debts are paid

Let’s look at one more initial transaction before we dive into recording and accumulating direct costs such as materials and labor.

Jackie finds the perfect building for her new business; an old woodworking shop that has most of the equipment she will need. She writes a check from her new business account in the amount of $2,500 for July rent. Because she took managerial accounting in college, she determines this to be an indirect product expense, so she records it as Factory Overhead following a three-step process:

• Analyze transaction

Because her entire facility is devoted to production, she determines that the rent expense is factory overhead.

2. Journalize transaction using debits and credits

If she is using QuickBooks ® or other accounting software, when she enters the transaction into the system, the software will create the journal entry. In any case, whether she does it by hand or computer, the entry will look much like this:

3. Post to the ledger

Again, her computer software will post the journal entry to the ledger, but we will follow this example using a visual system accountants call T-accounts. The T-account is an abbreviated ledger. Click here to view a more detailed example of a ledger .

Jackie posts her journal entry to the ledger (T-accounts here).

She now has three accounts: Checking Account, Owner’s Capital, and Factory Overhead, and the company ledger looks like this:

In a retail business, rent, salaries, insurance, and other operating costs are categorized into accounts classified as expenses. In a manufacturing business, some costs are classified as product costs while others are classified as period costs (selling, general, and administrative).

We’ll treat factory overhead as an expense for now, which is ultimately a sub-category of Owner’s Equity, so our accounting equation now looks like this:

Assets = Liabilities + Owner’s Equity

147,500 = 150,000 – 2,500

Notice that debits offset credits and vice versa. The balance in the checking account is the original deposit of $150,000, less the check written for $2,500. Once the check clears, if Jackie checks her account online, she’ll see that her ledger balance and the balance the bank reports will be the same.

Here is a summary of the rules of debits and credits:

Assets = increased by a debit, decreased by a credit

Liabilities = increased by a credit, decreased by a debit

Owner’s Equity = increased by a credit, decreased by a debit

Revenues increase owner’s equity, therefore an individual revenue account is increased by a credit, decreased by a debit

Expenses decrease owner’s equity, therefore an individual expense account is increased by a debit, decreased by a credit

Here’s Colin Dodds’s Accounting Rap Song again to help you remember the rules of debits and credits:

Let’s continue to explore job costing now by using this accounting system to assign and accumulate direct and indirect costs for each project.

When you are done with this section, you will be able to:

• Record direct materials and direct labor for a job
• Record allocated manufacturing overhead
• Prepare a job cost record

Learning Activities

The learning activities for this section include the following:

• Reading: Direct Costs
• Self Check: Direct Costs
• Reading: Allocated Overhead
• Self Check: Allocated Overhead
• Reading: Subsidiary Ledgers and Records
• Self Check: Subsidiary Ledgers and Records
• Introduction to Accumulating and Assigning Costs. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution
• Colin Dodds - Debit Credit Theory (Accounting Rap Song). Authored by : Mr. Colin Dodds. Located at : https://youtu.be/j71Kmxv7smk . License : All Rights Reserved . License Terms : Standard YouTube License
• What the General Ledger Can Tell You About Your Business. Authored by : Mary Girsch-Bock. Located at : https://www.fool.com/the-blueprint/general-ledger/ . License : All Rights Reserved . License Terms : Standard YouTube License

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Understanding Cost Objects – What They Are and Why They Matter

Businesses must clearly understand their costs as they strive to make informed financial decisions. One tool that companies use to track and manage their costs is cost objects.

But what exactly is a cost object, and how is it used in accounting and finance? In this blog post, we will explore the definition of cost objects, common types used in business and finance, and their role in cost accounting.

We will also answer frequently asked questions, including who assigns costs to cost objects and why we assign them. We will also discuss the challenges businesses may face when assigning costs and provide examples of cost objects used in the manufacturing industry.

Finally, we will explore techniques for allocating costs to cost objects and discuss how the size of a business can impact its use. By the end of this post, you will have a comprehensive understanding of cost objects and their importance in managing business finances.

What Is a Cost Object and How Is It Defined in Accounting and Finance? – Understanding Cost Objects

In accounting and finance, a cost object consumes resources or generates costs within a business or organization. It can be a product, service, project, department, customer, or any other entity that requires resources and generates costs.

A cost object can help identify the costs associated with producing a particular product or service, performing a specific activity, or serving a typical customer. This information can then be used to make more informed decisions about pricing, resource allocation, and process improvements .

For example, each bike would be a cost object in a manufacturing company that produces bicycles. The costs associated with producing each bicycle, such as materials, labor, and overhead expenses, would be tracked and assigned to that cost object.

This information can then be used to determine the true cost of each bicycle and make more informed decisions about pricing, production processes, and resource allocation.

In service-based businesses, cost objects can be more challenging to identify. For example, each project or client could be a cost object in a consulting firm. The costs associated with each project or client, such as labor and travel expenses, would be tracked and assigned to that cost object.

There are two types of cost objects: direct and indirect. Direct cost objects can be traced to a particular product, service, or activity. Indirect cost objects are not easily traced back to a particular product, service, or activity but consume resources and generate costs.

It is essential to accurately assign costs to cost objects to make more informed decisions about pricing, resource allocation, and process improvements. Failure to accurately assign costs to cost objects can lead to inaccurate pricing decisions, inefficient use of resources, and ultimately lower profits.

What Are Some Common Types of Cost Objects Used in Business and Finance? – Understanding Cost Objects

In business and finance, everyday cost objects are used to identify and track costs associated with producing goods or services, providing customer support, and managing operations. These cost objects help businesses understand the true costs of their activities and make informed decisions about pricing, resource allocation, and process improvements.

Output Cost – Types of Cost Objects Used in Business and Finance

One common type of cost object is the output cost. This refers to the cost of producing a good or providing a service that will be sold for a profit. It includes materials, labor, and overhead expenses directly associated with the production process. By accurately identifying and tracking output costs, businesses can determine the true cost of their products or services and make informed pricing decisions that maximize profits.

Operational Cost – Types of Cost Objects Used in Business and Finance

Another common type of cost object is operational cost. This includes departmental, functional, event, and customer-specific costs associated with managing and operating a business. 

For example, the operational cost of an event management company would include all expenses related to planning and executing events, such as venue rentals, catering, and marketing expenses. By tracking operational costs, businesses can identify areas where they can improve efficiency and reduce costs while maintaining a high service level.

Business Relationship Cost – Types of Cost Objects Used in Business and Finance

Business relationship costs are another type of cost object. These costs refer to the money spent promoting or maintaining relationships with customers, suppliers, and other business partners. 

For example, licensing fees, trade association dues, and customer freebies are all examples of business-related costs. These costs are significant because they help businesses establish and maintain strong relationships with their partners, which can lead to increased revenue and long-term success.

In addition to these types of cost objects, businesses may use many other objects to track costs and make informed decisions. 

For example, customer acquisition costs, which refer to acquiring new customers, can be useful for businesses looking to expand their customer base. Similarly, employee-related costs, such as salaries , benefits, and training expenses, can be tracked as a cost object to help businesses understand the true cost of their workforce.

What Is an Example of a Cost Object in Business? – Understanding Cost Objects

An example of a cost object in business could be a product line or a specific service. Let’s consider the scenario of a company that manufactures and sells three different types of smartphones – basic, mid-range, and premium. In this case, each product line is a cost object, and the company can track the costs associated with each line separately.

The company can identify and track the costs associated with each cost object to determine the cost of producing each smartphone model. For example, the cost of materials, labor, and overhead for producing each smartphone can be tracked separately for each product line .

This information can be used to make informed pricing decisions, as the company can determine the actual cost of each product and adjust the price accordingly to maximize profitability.

In addition to pricing decisions, cost objects can help identify areas where costs can be reduced or efficiency can be improved. For example, suppose the company identifies that the cost of producing the mid-range smartphone is higher than expected.

In that case, they can analyze the costs associated with that product line to identify areas where costs can be reduced. This may include identifying cheaper materials or streamlining the production process.

Another scenario where cost objects can be helpful is in customer profitability analysis. By tracking the costs associated with each customer, businesses can identify which customers are the most profitable and which are not. This information can be used to make informed decisions about customer acquisition and retention strategies.

Who Typically Assigns Costs to Cost Objects Within an Organization? – Understanding Cost Objects

In an organization, the process of assigning costs to cost objects is typically performed by various individuals or departments, depending on the size and complexity of the organization. The following list outlines some of the key stakeholders involved in the cost assignment process:

1. Management Accountants – Who Typically Assigns Costs to Cost Objects Within an Organization?

Management accountants are responsible for analyzing and reporting on the organization’s financial performance. They often play a key role in assigning costs to cost objects, as they deeply understand the organization’s financial systems and processes.

2. Production Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Production managers are responsible for overseeing the production process and ensuring that it runs smoothly and efficiently. They may assign costs to cost objects related to the production process, such as the cost of raw materials, labor, and equipment.

3. Sales and Marketing Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Sales and marketing managers promote the organization’s products or services and generate revenue. They may assign costs to cost objects related to sales and marketing activities, such as advertising and promotions.

4. Purchasing Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Purchasing managers are responsible for sourcing and procuring the materials and supplies needed for the organization’s operations. They may assign costs to cost objects related to the procurement process, such as raw materials and shipping costs.

5. IT Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

IT managers are responsible for overseeing the organization’s technology systems and infrastructure. They may assign costs to cost objects related to IT expenses, such as software licenses and hardware maintenance.

6. Human Resources Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Human resources managers are responsible for managing the organization’s workforce. They may assign costs to cost objects related to employee compensation, benefits, and training.

7. Financial Controllers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Financial controllers are responsible for managing the organization’s financial systems and processes. They may assign costs to cost objects related to overhead expenses, such as rent, utilities, and insurance.

8. Operations Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Operations managers are responsible for overseeing the day-to-day operations of the organization. They may assign costs to cost objects related to operational expenses, such as supplies and equipment maintenance.

In addition to these stakeholders, other individuals or departments may be involved in the cost assignment process, depending on the specific needs and requirements of the organization. For example, a large manufacturing company may have a dedicated cost accounting team responsible for assigning costs to cost objects and analyzing the organization’s financial performance.

How Are Cost Objects Used in Cost Accounting to Help Businesses Manage Their Costs? – Understanding Cost Objects

Cost accounting is a branch of accounting that focuses on measuring, analyzing, and reporting the costs associated with producing goods or providing services. 

One of the key concepts in cost accounting is the use of cost objects, which are specific items, products, or activities to which costs can be attributed. 

Cost objects are used to help businesses manage their costs in several ways, as outlined below:

1. Cost Control – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses control costs by identifying the specific items or activities driving their expenses. By assigning costs to specific cost objects, businesses can track their expenses more accurately and identify areas where they may be overspending. 

For example, a manufacturing company may use cost objects to track the costs of producing each product in its line. This can help them identify the most profitable products needing reevaluation or discontinued.

2. Cost Analysis – How Are Cost Objects Used in Cost Accounting

Cost objects also help businesses analyze costs and make informed decisions about managing them. By analyzing the costs associated with specific cost objects, companies can identify trends, patterns, and areas for improvement. 

For example, a service-based company may use cost objects to track the costs associated with each client or project. This can help them identify which clients or projects are the most profitable and which may cost them money.

3. Cost Planning – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses plan for their costs and make informed pricing, budgeting, and resource allocation decisions. 

By understanding the costs associated with specific cost objects, businesses can make more accurate projections about their future expenses and revenues. For example, a construction company may use cost objects to track the costs associated with each phase of a building project. This can help them create more accurate project estimates and avoid cost overruns.

4. Cost Reduction – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses reduce their costs by identifying areas where they may be able to streamline their operations or reduce waste. 

By analyzing the costs associated with specific cost objects, businesses can identify opportunities for cost reduction and implement strategies to improve their efficiency. For example, a retail store may use cost objects to track the costs associated with each product line. This can help them identify the most profitable products that may tie up valuable resources.

5. Cost Allocation – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses allocate their costs to the appropriate departments, products, or services. By assigning costs to specific cost objects, businesses can ensure that their expenses are accurately allocated and reported. 

This can help them make more informed decisions about resource allocation and pricing. For example, a hospital may use cost objects to track the costs associated with each patient. This can help them allocate costs to the appropriate departments and ensure their expenses are accurately reported to insurance providers and regulatory agencies.

When Would It Be Appropriate to Use a Project as a Cost Object? – Understanding Cost Objects

Using a project as a cost object can be appropriate in several situations, as outlined below:

1. Project Cost Control – When Would It Be Appropriate to Use a Project as a Cost Object?

By using a project as a cost object, businesses can control their costs more effectively by tracking the expenses associated with a specific project. 

This can help them identify areas where they may be overspending and take corrective action before it is too late. For example, a construction company may use a project as a cost object to track the costs associated with building a new office building. This can help them monitor their expenses and ensure they stay within budget.

2. Project Cost Analysis – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can also help businesses analyze their costs and make informed decisions about future projects. 

By analyzing the costs associated with a specific project, businesses can identify areas to reduce costs or improve their efficiency. For example, a software development company may use a project as a cost object to track the costs of developing a new app. This can help them identify areas where they may be able to streamline their development process and reduce costs.

3. Project Cost Planning – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can help businesses plan for their costs more effectively by providing a detailed breakdown of the expenses associated with a specific project. 

This can help businesses make more accurate projections about their expenses and revenues. For example, a marketing agency may use a project as a cost object to track the costs associated with developing a new advertising campaign. This can help them create more accurate project estimates and avoid cost overruns.

4. Project Cost Reduction – When Would It Be Appropriate to Use a Project as a Cost Object?

By using a project as a cost object, businesses can identify areas where they may be able to reduce costs and improve their efficiency. This can help them achieve their goals more effectively and with fewer resources. 

For example, a manufacturing company may use a project as a cost object to track the costs associated with developing a new product line. This can help them identify areas where they may be able to reduce costs and improve their manufacturing processes.

5. Project Cost Allocation – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can help businesses allocate their costs more accurately to the appropriate departments or products. By tracking the expenses associated with a specific project, businesses can ensure that their costs are allocated correctly and reported accurately. 

For example, a consulting firm may use a project as a cost object to tracking the costs associated with a specific client engagement. This can help them allocate costs to the appropriate departments and ensure that their expenses are accurately reported.

Who Benefits the Most From Using Cost Objects to Track Expenses in a Business?

Below are some of the stakeholders that can benefit the most from using cost objects to track expenses in a business:

1. Management – Who Benefits the Most From Using Cost Objects?

One of the primary beneficiaries of using cost objects to track expenses is management. By better understanding where money is spent within a company, management can make more informed decisions about where to allocate resources, which projects to pursue, and which expenses to cut. Cost objects can also help management identify areas where efficiency and costs can be improved.

2. Accountants – Who Benefits the Most From Using Cost Objects?

Accountants also benefit from using cost objects to track expenses in a business. Cost objects provide a more accurate picture of where money is being spent, which helps accountants create more accurate financial statements. This can help them comply with financial reporting requirements, such as GAAP or IFRS, and provide stakeholders with a clear view of the company’s financial health.

3. Sales and Marketing – Who Benefits the Most From Using Cost Objects?

Sales and marketing teams can benefit from using cost objects to track expenses by understanding the cost of acquiring new customers or generating new leads. Using cost objects, they can see how much money is spent on specific campaigns or initiatives and make informed decisions about where to invest their resources.

4. Operations – Who Benefits the Most From Using Cost Objects?

Operations teams can benefit from using cost objects to track expenses by identifying areas where efficiency can be improved. By understanding the cost of specific processes or activities, operations teams can find ways to streamline operations and reduce costs.

5. Investors – Who Benefits the Most From Using Cost Objects?

Investors can benefit from using cost objects to track expenses in a business by having a better understanding of how the company is using its resources. This can help them make informed decisions about whether or not to invest in a company and can provide insight into the company’s long-term financial health.

6. Customers – Who Benefits the Most From Using Cost Objects?

While not traditional stakeholders, customers can indirectly benefit from using cost objects to track expenses in a business. By better understanding where money is being spent, companies can potentially reduce their costs and offer products or services at a lower price point. This can ultimately benefit customers by providing them with more affordable options.

What Are Some Challenges Businesses May Face When Assigning Costs to Cost Objects? – Understanding Cost Objects

Assigning costs to cost objects can be challenging for businesses, mainly when numerous cost objects are involved or when the costs are not easily attributable to a specific object. Below are some of the common challenges businesses may face when assigning costs to cost objects:

1. Identifying Cost Objects – Challenges Businesses May Face

One of the biggest challenges businesses face when assigning costs to cost objects is identifying the appropriate cost objects. It can be challenging to determine which costs should be assigned to which cost objects, mainly if many cost objects are involved or if the costs are not easily attributable to a specific object.

2. Allocating Indirect Costs – Challenges Businesses May Face

Another challenge businesses face when assigning costs to cost objects is allocating indirect costs. Indirect costs, such as overhead or administrative expenses, can be difficult to allocate to specific cost objects. Businesses may need to use allocation methods, such as activity-based costing, to allocate indirect costs to cost objects.

3. Choosing the Right Allocation Method – Challenges Businesses May Face

Businesses may face challenges in choosing the right allocation method when assigning costs to cost objects. Several different allocation methods are available, each with advantages and disadvantages. Choosing the correct method can be challenging and may require careful consideration of the specific circumstances and goals of the business.

4. Ensuring Accuracy – Challenges Businesses May Face

Assigning costs to cost objects requires accuracy to ensure the resulting data is reliable and valuable. However, achieving accuracy can be difficult, mainly if the data is incomplete or inaccurate. Businesses may need to implement procedures to ensure data accuracy in cost allocation.

5. Updating Cost Object Data – Challenges Businesses May Face

Cost objects may change over time, challenging businesses when assigning costs. For example, if a product line is discontinued, the costs associated with that product line may need to be allocated to a different cost object. Businesses must ensure that they regularly update cost object data to reflect changes in the industry.

6. Ensuring Consistency – Challenges Businesses May Face

Consistency in cost allocation is important to ensure the resulting data is comparable over time. However, achieving consistency can be challenging, mainly if the business uses different allocation methods or cost objects over time. Companies may need to implement procedures to ensure that cost allocation is consistent over time.

7. Dealing with Complexity – Challenges Businesses May Face

Some businesses may have complex operations, making assigning costs to cost objects challenging. For example, assigning costs to cost objects can become complex if a business operates in multiple locations or has multiple product lines. Businesses may need sophisticated cost allocation methods or software to handle this complexity.

When Should a Business Consider Creating a New Cost Object? – Understanding Cost Objects

There may be situations where a business needs to create a new cost object to manage costs better. 

Below are some scenarios where a business should consider creating a new cost object:

1. Introducing a New Product or Service – When Should a Business Consider Creating a New Cost Object?

When a business introduces a new product or service, creating a new cost object may be appropriate to track the costs associated with that product or service. This can help the business to determine the profitability of the new offering and to identify opportunities to reduce costs.

2. Expanding into a New Market or Region – When Should a Business Consider Creating a New Cost Object?

If a business expands into a new market or region, it may need to create a new cost object to track the costs associated with that market or region. This can help the business determine whether the expansion is profitable and identify opportunities to reduce costs in the new market or region.

3. Undertaking a Large Project – When Should a Business Consider Creating a New Cost Object?

When a business undertakes a large project, such as building a new factory or launching a new marketing campaign, it may be appropriate to create a new cost object to track the costs associated with the project. This can help the business determine the project’s total cost and identify opportunities to reduce costs.

4. Tracking Costs for a Specific Customer – When Should a Business Consider Creating a New Cost Object?

Sometimes, a business may want to track costs associated with a specific customer, particularly if that customer represents a significant portion of the business’s revenue. Creating a new cost object for the customer can help the business determine the customer’s profitability and identify opportunities to reduce costs associated with serving that customer.

5. Managing Costs for a Specific Department – When Should a Business Consider Creating a New Cost Object?

Suppose a business wants to track costs associated with a specific department, such as human resources or IT. In that case, creating a new cost object for that department may be appropriate. This can help the business determine the department’s total cost and identify opportunities to reduce costs.

6. Reorganizing the Business – When Should a Business Consider Creating a New Cost Object?

Suppose a business undergoes a significant reorganization, such as merging with another company or restructuring its operations. In that case, it may be appropriate to create new cost objects to reflect the new organizational structure. This can help the business to track costs associated with the new structure and to identify opportunities to reduce costs.

What Are Some Examples of Cost Objects Used in the Manufacturing Industry? – Understanding Cost Objects

In the manufacturing industry, cost objects are crucial in determining the cost of producing goods. Cost objects track and allocate costs to specific products, departments, or activities. This helps manufacturers understand the true cost of production and make informed decisions to improve profitability. Some common examples of cost objects used in the manufacturing industry include:

1. Products – Examples of Cost Objects Used in the Manufacturing Industry

Producing a specific product is an everyday cost object in manufacturing. By tracking the cost of materials, labor, and overhead associated with producing a product, manufacturers can determine the profitability of each product and make informed decisions about pricing, production volumes, and product mix.

2. Production Processes – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can also be used to track the cost of specific production processes, such as assembly, machining, or testing. By understanding the cost of each process, manufacturers can identify inefficiencies, reduce waste, and optimize production to improve profitability.

3. Departments – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of individual departments within a manufacturing facility, such as production, engineering, or quality control. By understanding the cost of each department, manufacturers can identify opportunities to reduce costs and improve efficiency.

4. Suppliers – Examples of Cost Objects Used in the Manufacturing Industry

Manufacturers can also use cost objects to track the cost of materials and services specific suppliers provide. By understanding the cost of each supplier, manufacturers can negotiate better pricing, improve supplier relationships, and reduce supply chain risks.

5. Equipment – Examples of Cost Objects Used in the Manufacturing Industry

Operating and maintaining specific equipment costs can be tracked using cost objects. By understanding the cost of each piece of equipment, manufacturers can identify opportunities to improve equipment efficiency, reduce downtime, and optimize maintenance schedules.

6. Customers – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of serving specific customers. By understanding the cost of each customer, manufacturers can identify which customers are profitable and which are not and make informed decisions about pricing, sales, and marketing.

7. Projects – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of specific projects, such as new product development, process improvement, or facility upgrades. By understanding the cost of each project, manufacturers can make informed decisions about project prioritization, resource allocation, and project management.

What Are Some Techniques Used to Allocate Costs to Cost Objects? – Understanding Cost Objects

There are several techniques used to allocate costs to cost objects, including:

1. Direct Allocation – Techniques Used to Allocate Costs to Cost Objects

Direct allocation is the simplest method, assigning costs directly to a specific cost object. For example, the cost of raw materials used in a product can be assigned directly to that product.

2. Activity-Based Costing (ABC) – Techniques Used to Allocate Costs to Cost Objects

ABC is a more sophisticated method of cost allocation that assigns costs to cost objects based on the activities that drive those costs. 

ABC involves identifying all the activities involved in producing a product or service and assigning the costs associated with each activity to the cost object. This method is proper when products or services require different activity levels and when traditional allocation methods may not accurately reflect the cost drivers.

3. Job Order Costing – Techniques Used to Allocate Costs to Cost Objects

Job order costing is a cost allocation method used in manufacturing companies that produce custom or unique products. With job order costing, costs are assigned to a specific job or order rather than a product or service. For example, a custom furniture manufacturer might use job order costing to track the costs of producing a specific piece of furniture.

4. Process Costing – Techniques Used to Allocate Costs to Cost Objects

Process costing is a cost allocation method used in manufacturing companies that produce large quantities of identical products. It assigns costs to a specific production process rather than a product or service. For example, a cereal manufacturer might use process costing to track the costs associated with producing a certain type of cereal.

5. Standard Costing – Techniques Used to Allocate Costs to Cost Objects

Standard costing is a method of allocation that assigns costs to cost objects based on predetermined standards or estimates. This method is often used in manufacturing companies that produce large quantities of identical products. Standard costing assigns costs based on the estimated cost of producing a single product unit .

6. Variable Costing – Techniques Used to Allocate Costs to Cost Objects

Variable costing is a method of allocation that assigns only variable costs to a specific cost object, such as direct materials, direct labor, and variable overhead. 

Fixed costs are not assigned to a specific cost object but are treated as period expenses. This method is proper when analyzing the profitability of particular products or services, as it provides a more accurate picture of the variable costs associated with production.

How Does the Size of a Business Impact the Use of Cost Objects? – Understanding Cost Objects

The size of a business can impact the use of cost objects in several ways.

Firstly, smaller businesses may have fewer cost objects than larger firms, as they may have a simpler organizational structure and product/service offerings. This can make it easier for them to assign and track costs, as there are fewer cost objects to manage.

On the other hand, larger businesses may have a more complex organizational structure, with multiple departments and product/service offerings. This can result in more cost objects, making assigning and tracking costs more challenging. However, larger businesses may also have more resources and specialized personnel to manage and allocate costs to cost objects.

Secondly, the size of a business can impact the level of detail in cost tracking. Smaller companies may not require as detailed cost tracking as larger businesses, as they may have fewer transactions and expenses to manage. For example, a small retail business may only need to track costs at a high level for each product category, while a large retail chain may need to track costs for each product SKU.

Thirdly, the size of a business can impact the choice of cost allocation methods. Smaller companies may have more flexibility in choosing a cost allocation method, as they may have a more straightforward cost structure . Larger businesses, on the other hand, may need to use more complex cost allocation methods to assign costs to each cost object accurately.

How Can Businesses Stay Up-to-Date With Best Practices for Using Cost Objects in Accounting and Finance? – Understanding Cost Objects

To stay up-to-date with best practices for using cost objects in accounting and finance, businesses can take several steps:

1. Attend Industry Conferences And Seminars – Staying Up-to-Date With Best Practices

Attending conferences and seminars related to accounting and finance can provide businesses with the latest updates and best practices in cost object management. These events are also an excellent opportunity to network with other professionals in the field.

2. Read Industry Publications – Staying Up-to-Date With Best Practices

Keeping up-to-date with industry publications, such as accounting and finance journals, can provide businesses with valuable insights and best practices for using cost objects. Subscribing to newsletters and following industry influencers on social media can also provide helpful information.

3. Engage With Professional Associations – Staying Up-to-Date With Best Practices

Professional associations, such as the American Institute of Certified Public Accountants (AICPA), offer accounting and finance professionals training and resources. Engaging with these organizations can provide businesses access to the latest updates and best practices in cost object management.

4. Utilize Technology – Staying Up-to-Date With Best Practices

Advances in technology have made it easier for businesses to manage their costs and allocate them to cost objects. Cost accounting software can give businesses real-time data and analytics to make informed business decisions.

5. Work With A Professional Accountant – Staying Up-to-Date With Best Practices

Working with a professional accountant can guide businesses on best practices for using cost objects. An experienced accountant can also help businesses identify areas for improvement and implement effective cost-management strategies.

Conclusion – Understanding Cost Objects

In conclusion, understanding cost objects is a crucial aspect of cost accounting and finance for any business. It allows for effective cost management and decision-making, enabling companies to accurately track expenses and allocate costs to the appropriate sources.

By identifying and assigning costs to cost objects, businesses can gain insights into their operations, identify areas for improvement, and optimize their financial performance. However, it is essential to consider the challenges that may arise when assigning costs to cost objects and to review and update the allocation methods used regularly.

With the right techniques and best practices, businesses of all sizes can benefit from using cost objects in their accounting and finance practices. By staying up-to-date with the latest trends and practices in cost accounting, companies can ensure that they make informed decisions and maximize their profitability.

Recommended Readings – Conclusion

• Understanding Absorption Costing and Improving Absorption Rate
• Cost of Goods Sold COGS- Defined & Explained (With Examples)
• Opportunity Cost- Defined & Explained (With Examples)

Frequently Asked Questions – Understanding Cost Objects

1. what is the main purpose of the cost object – faqs.

The primary purpose of a cost object is to enable a business to identify and track the costs associated with a specific item, product, service, or activity.

By assigning costs to cost objects, businesses can analyze and manage their expenses more effectively, make informed decisions, and improve profitability. Cost objects provide businesses with a way to allocate costs accurately and fairly and help them understand the financial impact of each cost element on their overall operations.

For example, a manufacturing company might assign costs to each unit of a particular product to determine its profitability, or a service-based business might give costs to specific clients to better understand the profitability of each customer relationship. 

2. Why Do We Assign Cost to Cost Objects? – FAQs

We assign costs to cost objects for several reasons. The primary reason is to track the costs associated with producing a product, providing a service, or engaging in an activity. By assigning costs to specific cost objects, we can accurately measure the expenses that go into producing each unit or providing each service. This allows us to calculate profitability, set prices, and make informed decisions about our business operations.

Another reason we assign costs to cost objects is to allocate expenses fairly and accurately across different departments, products, or services. This helps us understand which areas of our business are the most profitable and where we need to make adjustments to improve performance. By allocating costs to cost objects, we can ensure that each business area is responsible for its expenses and that costs are shared fairly across the organization.

Finally, assigning costs to cost objects allows us to comply with accounting and financial reporting standards. For example, businesses must report their expenses in financial statements, and assigning costs to cost objects helps ensure that these reports accurately reflect the expenses associated with each product or service. This is important for regulatory compliance and providing investors and other stakeholders with accurate financial information.

Updated:5/18/202

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Elements and Components of Cost

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 03, 2023

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According to the Oxford Dictionary, cost means “the price paid for something.”

However, in management terminology, cost refers to expenditure and not to price. A cost represents a sacrifice or a release of something of value.

The Institute of Cost and Management Accountants, London, has defined cost as “the amount of expenditure (actual or notional) incurred on or attributable to a given thing.”

For instance, cost items in the manufacture of cotton fabrics comprise the expenditure involved in the purchase of cotton yarn, wages paid to weavers, factory foreman salaries, depreciation on machinery, notional rent of owned factory building, and so forth.

Elements of Cost

One of the primary objects of cost accounting involves analyzing the total cost of production and providing the most helpful information.

The analysis and classification of costs refer to the factors resulting in expenditure. Otherwise known as the elements of cost, these costs may also refer to smaller costs of identical nature.

The elements of cost comprise:

• Material cost
• Labor cost or wages

Material Cost

Material cost refers to the commodities supplied to an undertaking, such as the cost of yarn and dyes engaged in manufacturing cloth.

Further subdivisions of material costs include:

• Direct material cost: The cost of materials identifiable with and allocated to cost centers or cost units, such as the cost of wood in the case of furniture. Direct materials enter into and form part of the finished product.
• Indirect material cost: The material cost that cannot be allocated but can be apportioned to or absorbed by cost centers or cost units.

These materials cannot be traced as part of the product, and their cost is distributed among the cost centers or cost units on an equitable basis.

Labor Cost (or Wages)

The cost of remunerating the employees of an undertaking, e.g., wages, salaries, and commission.

Further subdivisions include:

1. Direct labor cost (or direct wages) : The labor cost identifiable with and allocated to cost centers or cost units.

Direct labor cost includes the remuneration paid to convert raw materials into finished products or alter the construction, composition, or condition of the product manufactured by an undertaking.

Direct labor cost also includes the wages paid to those who directly carry out or operate a service, such as a driver and conductor of a bus in the transport business.

2. Indirect labor cost (or indirect wages) : The labor cost or wages that cannot be allocated but can be apportioned to or absorbed by cost centers or cost units, such as the salary paid to a factory manager.

The cost of services provided to an undertaking and the notional cost of using owned assets (i.e., depreciation of an owned factory building).

Subdivisions of expenses include:

1. Direct expenses (or chargeable expenses): The expenses (other than direct material cost and direct labor cost) identifiable with and allocated to cost centers or cost units.

One example is octroi paid on the purchases of imported direct materials (if not added to their purchase price).

2. Indirect expenses: Expenses that cannot be allocated but can be apportioned to or absorbed by cost centers or cost units, such as rent, rates, taxes, insurance of the factory building, factory lighting, repairs, and so forth.

The aggregated direct material cost, direct labor cost, and direct expenses result in the direct cost.

The aggregated indirect material cost , indirect labor cost , and indirect expenses are known as the indirect cost or overhead , which can be classified into:

• Factory overhead or works overhead: All the indirect costs incurred in manufacturing operations: indirect materials, indirect labor, and all other indirect expenses, such as wages, factory rent, factory rates, repairs, and so forth.
• Office and administration overhead: All the indirect costs relating to the direction, control, and administration of an undertaking, such as office rent and staff salaries.
• Selling and distribution overhead: All indirect costs incurred for promoting sales, retaining customers, and delivering goods after their manufacture, such as advertising, salesmen salaries, commission on sales, carriage on sales, and packing charges.

Components of Cost

The cumulation or aggregate of different elements of cost. Aggregating or grouping the various elements obtains the following components or types of cost:

• Prime cost : The aggregate of the direct material cost, direct labor cost, and direct expenses. Otherwise known as flat cost, first cost, and direct cost.
• Factory cost: Results from the prime cost plus the factory overhead (or works overhead) and comprises the aggregated direct material cost, direct labor cost, direct expenses, and factory overhead.

Factory cost is also known as works cost, production cost , or manufacturing cost.

• Office cost: Results from the factory cost plus the office and administrative overhead . Otherwise known as gross cost or cost of production.
• Total cost: Made up of the cost of production plus the selling and distribution overhead.

Comprises all elements of cost or items of expenditure up until the sale of the commodity. Otherwise known as the selling cost or cost of sales.

Selling Price

The selling cost (or the total cost or the cost of sales) plus profit .

Simplified Formulas

• Direct material cost + Direct wages + Direct expenses = Prime cost
• Prime cost + Factory overhead = Factory cost
• Factory cost + Office and administration overhead = Office cost
• Office cost + Selling and distribution overhead = Total cost
• Total cost + Profit = Selling price

Elements and Components of Cost FAQs

What is a cost.

According to the oxford dictionary, cost means “the price paid for something.”

What are the elements of cost?

The elements of cost comprise: Material Cost, labor cost or wages, and expenses

What is the analysis and classification of costs?

What is a material cost.

Material Cost refers to the commodities supplied to an undertaking, such as the cost of yarn and dyes engaged in manufacturing cloth.

What is meant by labor cost (or wages)?

The cost of remunerating the employees of an undertaking, e.G., Wages, salaries, and commission.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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• Cost Classifications
• Relevant Cost of Material
• Manufacturing Overhead Costs
• Conversion Costs
• Quality Costs
• Revenue Expenditure
• Product Cost vs Period Cost
• Direct Costs and Indirect Costs
• Prime Costs and Conversion Costs
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• Cost Allocation
• Joint Products
• Accounting for Joint Costs
• Service Department Cost Allocation
• Repeated Distribution Method
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• Direct Allocation Method

Cost allocation is the process by which the indirect costs are distributed among different cost objects such as a project, a department, a branch, a customer, etc. It involves identifying the cost object, identifying and accumulating the costs that are incurred and assigning them to the cost object on some reasonable basis.

Cost allocation is important for both pricing and planning and control decisions. If costs are not accurately calculated, a business might never know which products are making money and which ones are losing money. If cost are mis-allocated, a business may be charging wrong price to its customers and/or it might be wasting resources on products that are wrongly categorized as profitable.

Cost allocation is a sub-process of cost assignment , which is the overall process of finding total cost of a cost object. Cost assignment involves both cost tracing and cost allocation. Cost tracing encompasses finding direct costs of a cost object while the cost allocation is concerned with indirect cost charge.

Steps in cost allocation process

Typical cost allocation mechanism involves:

• Identifying the object to which the costs have to be assigned,
• Accumulating the costs in different pools,
• Identifying the most appropriate basis/method for allocating the cost.

Cost object

A cost object is an item for which a business need to separately estimate cost.

Examples of cost object include a branch, a product line, a service line, a customer, a department, a brand, a project, etc.

A cost pool is the account head in which costs are accumulated for further assignment to cost objects.

Examples of cost pools include factory rent, insurance, machine maintenance cost, factory fuel, etc. Selection of cost pool depends on the cost allocation base used. For example if a company uses just one allocation base say direct labor hours, it might use a broad cost pool such as fixed manufacturing overheads. However, if it uses more specific cost allocation bases, for example labor hours, machine hours, etc. it might define narrower cost pools.

Cost driver

A cost driver is any variable that ‘drives’ some cost. If increase or decrease in a variable causes an increase or decrease is a cost that variable is a cost driver for that cost.

Examples of cost driver include:

• Number of payments processed can be a good cost driver for salaries of Accounts Payable section of accounting department,
• Number of purchase orders can be a good cost driver for cost of purchasing department,
• Number of invoices sent can be a good cost driver for cost of billing department,
• Number of units shipped can be a good cost driver for cost of distribution department, etc.

While direct costs are easily traced to cost objects, indirect costs are allocated using some systematic approach.

Cost allocation base

Cost allocation base is the variable that is used for allocating/assigning costs in different cost pools to different cost objects. A good cost allocation base is something which is an appropriate cost driver for a particular cost pool.

T2F is a university café owned an operated by a student. While it has plans for expansion it currently offers two products: (a) tea & coffee and (b) shakes. It employs 2 people: Mr. A, who looks after tea & coffee and Mr. B who prepares and serves shakes & desserts.

Its costs for the first quarter are as follows:

Total tea and coffee sales and shakes sales were $50,000 & $60,000 respectively. Number of customers who ordered tea or coffee were 10,000 while those ordering shakes were 8,000.

The owner is interested in finding out which product performed better.

Salaries of Mr. A & B and direct materials consumed are direct costs which do not need any allocation. They are traced directly to the products. The rest of the costs are indirect costs and need some basis for allocation.

Cost objects in this situation are the products: hot beverages (i.e. tea & coffee) & shakes. Cost pools include rent, electricity, music, internet and wi-fi subscription and magazines.

Appropriate cost drivers for the indirect costs are as follows:

Since number of customers is a good cost driver for almost all the costs, the costs can be accumulated together to form one cost pool called manufacturing overheads. This would simply the cost allocation.

Total manufacturing overheads for the first quarter are $19,700. Total number of customers who ordered either product are 18,000. This gives us a cost allocation base of $1.1 per customer ($19,700/18,000).

A detailed cost assignment is as follows:

Manufacturing overheads allocated to Tea & Cofee = $1.1×10,000

Manufacturing overheads allocated to Shakes = $1.1×8,000

by Irfanullah Jan, ACCA and last modified on Jul 22, 2020

Related Topics

• Cost Behavior

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Direct Costs

Indirect costs, fixed costs, variable costs, operating costs, opportunity costs, controllable costs, the bottom line.

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What Are the Types of Costs in Cost Accounting?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

Cost accounting is an accounting process that measures all of the costs associated with production, including both fixed and variable costs. The purpose of cost accounting is to assist management in decision-making processes that optimize operations based on efficient cost management. The costs included in cost accounting are discussed in detail below.

Key Takeaways

• Cost accounting is an accounting method that takes into consideration a company's total cost of production by evaluating both fixed and variable costs.
• Managers use cost accounting to help make business decisions based on efficient cost management.
• The types of costs evaluated in cost accounting include variable costs, fixed costs, direct costs, indirect costs, operating costs, opportunity costs, sunk costs, and controllable costs.
• Cost accounting is not generally accepted accounting principles (GAAP) compliant and can only be used for internal decision-making.

Direct costs are related to producing a good or service. A direct cost includes raw materials, labor, and expense or distribution costs associated with producing a product. The cost can easily be traced to a product, department, or project.

For example, Ford Motor Company ( F ) manufactures cars and trucks. A plant worker spends eight hours building a car. The direct costs associated with the car are the wages paid to the worker and the cost of the parts used to build the car.

Indirect costs, on the other hand, are expenses unrelated to producing a good or service. An indirect cost cannot be easily traced to a product, department, activity, or project. For example, with Ford, the direct costs associated with each vehicle include tires and steel.

However, the electricity used to power the plant is considered an indirect cost because the electricity is used for all the products made in the plant. No one product can be traced back to the electric bill.

Fixed costs do   not vary with the number of goods or services a company produces over the short term. For example, suppose a company leases a machine for production for two years. The company has to pay $2,000 per month to cover the cost of the lease , no matter how many products that machine is used to make. The lease payment is considered a fixed cost as it remains unchanged.

Variable costs fluctuate as the level of production output changes, contrary to a fixed cost. This type of cost varies depending on the number of products a company produces. A variable cost increases as the production volume increases, and it falls as the production volume decreases. Businesses can also decide to forego an activity or production to avoid the associated expenses—called the avoidable costs .

For example, a toy manufacturer must package its toys before shipping products out to stores. This is considered a type of variable cost because, as the manufacturer produces more toys, its packaging costs increase, however, if the toy manufacturer's production level is decreasing, the variable cost associated with the packaging decreases.

Operating costs   are expenses associated with day-to-day business activities but are not traced back to one product. Operating costs can be variable or fixed. Examples of operating costs, which are more commonly called operating expenses , include rent and utilities for a manufacturing plant.

Operating costs are day-to-day expenses, but are classified separately from indirect costs – i.e., costs tied to actual production. Investors can calculate a company's operating expense ratio, which shows how efficient a company is in using its costs to generate sales.

Opportunity cost  is the benefits of an alternative given up when one decision is made over another. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it's the difference in return between a chosen investment and one that is passed up. For companies, opportunity costs do not show up in the financial statements but are useful in planning by management. 

For example, a company decides to buy a new piece of manufacturing equipment rather than lease it. The opportunity cost would be the difference between the cost of the cash outlay for the equipment and the improved productivity versus how much money could have been saved in interest expense had the money been used to pay down debt.

Sunk costs are historical costs that have already been incurred and will not make any difference in the current decisions by management. Sunk costs are those costs that a company has committed to and are unavoidable or unrecoverable costs. Sunk costs are excluded from future business decisions.

Controllable costs are expenses managers have control over and have the power to increase or decrease. Controllable costs are considered when the decision of taking on the cost is made by one individual. Common examples of controllable costs are office supplies, advertising expenses, employee bonuses, and charitable donations. Controllable costs are categorized as short-term costs as they can be adjusted quickly.

What Are the Types of Cost Accounting?

The different types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing. Standard costing uses standard costs rather than actual costs for cost of goods sold (COGS) and inventory. Activity-based costing takes overhead costs from different departments and pairs them with certain cost objects. Lean accounting replaces traditional costing methods with value-based pricing. Marginal costing evaluates the impact on cost by adding one additional unit into production.

What Is the Main Purpose of Cost Accounting?

The main purpose of cost accounting is to evaluate the costs of a business and based on the data, make better decisions, improve efficiency, determine the best selling price, reduce costs, and determine the profit of each activity involved in the operational process.

What Is the Difference Between Cost Accounting and Financial Accounting?

Cost accounting focuses on a business's costs and uses the data on costs to make better business decisions, with the goal of reducing costs and improving profitability at every stage of the operational process. Financial accounting is focused on reporting the financial results and financial condition of the entire business entity.

Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company's cost structure allows management to improve the way it runs its business and therefore improve the value of the firm.

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What is Cost Assignment?

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Cost assignment.

Cost assignment is the process of associating costs with cost objects, such as products, services, departments, or projects. It encompasses the identification, measurement, and allocation of both direct and indirect costs to ensure a comprehensive understanding of the resources consumed by various cost objects within an organization. Cost assignment is a crucial aspect of cost accounting and management accounting, as it helps organizations make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

There are two main components of cost assignment:

• Direct cost assignment: Direct costs are those costs that can be specifically traced or identified with a particular cost object. Examples of direct costs include direct materials, such as raw materials used in manufacturing a product, and direct labor, such as the wages paid to workers directly involved in producing a product or providing a service. Direct cost assignment involves linking these costs directly to the relevant cost objects, typically through invoices, timesheets, or other documentation.
• Indirect cost assignment (Cost allocation): Indirect costs, also known as overhead or shared costs, are those costs that cannot be directly traced to a specific cost object or are not economically feasible to trace directly. Examples of indirect costs include rent, utilities, depreciation, insurance, and administrative expenses. Since indirect costs cannot be assigned directly to cost objects, organizations use various cost allocation methods to distribute these costs in a systematic and rational manner. Some common cost allocation methods include direct allocation, step-down allocation, reciprocal allocation, and activity-based costing (ABC).

In summary, cost assignment is the process of associating both direct and indirect costs with cost objects, such as products, services, departments, or projects. It plays a critical role in cost accounting and management accounting by providing organizations with the necessary information to make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

Example of Cost Assignment

Let’s consider an example of cost assignment at a bakery called “BreadHeaven” that produces two types of bread: white bread and whole wheat bread.

BreadHeaven incurs various direct and indirect costs to produce the bread. Here’s how the company would assign these costs to the two types of bread:

• Direct cost assignment:

Direct costs can be specifically traced to each type of bread. In this case, the direct costs include:

• Direct materials: BreadHeaven purchases flour, yeast, salt, and other ingredients required to make the bread. The cost of these ingredients can be directly traced to each type of bread.
• Direct labor: BreadHeaven employs bakers who are directly involved in making the bread. The wages paid to these bakers can be directly traced to each type of bread based on the time spent working on each bread type.

For example, if BreadHeaven spent $2,000 on direct materials and $1,500 on direct labor for white bread, and $3,000 on direct materials and $2,500 on direct labor for whole wheat bread, these costs would be directly assigned to each bread type.

• Indirect cost assignment (Cost allocation):

Indirect costs, such as rent, utilities, equipment maintenance, and administrative expenses, cannot be directly traced to each type of bread. BreadHeaven uses a cost allocation method to assign these costs to the two types of bread.

Suppose the total indirect costs for the month are $6,000. BreadHeaven decides to use the number of loaves produced as the allocation base , as it believes that indirect costs are driven by the production volume. During the month, the bakery produces 3,000 loaves of white bread and 2,000 loaves of whole wheat bread, totaling 5,000 loaves.

The allocation rate per loaf is:

Allocation Rate = Total Indirect Costs / Total Loaves Allocation Rate = $6,000 / 5,000 loaves = $1.20 per loaf

BreadHeaven allocates the indirect costs to each type of bread using the allocation rate and the number of loaves produced:

• White bread: 3,000 loaves × $1.20 per loaf = $3,600
• Whole wheat bread: 2,000 loaves × $1.20 per loaf = $2,400

After completing the cost assignment, BreadHeaven can determine the total costs for each type of bread:

• White bread: $2,000 (direct materials) + $1,500 (direct labor) + $3,600 (indirect costs) = $7,100
• Whole wheat bread: $3,000 (direct materials) + $2,500 (direct labor) + $2,400 (indirect costs) = $7,900

By assigning both direct and indirect costs to each type of bread, BreadHeaven gains a better understanding of the full cost of producing each bread type, which can inform pricing decisions, resource allocation, and performance evaluation.

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S/4 HANA Finance - Dealing with SAP Cost Elements

by Janet Salmon

This blog post about S4HANA Cost Elements is from our friends at  SAPexpert  - the source for trusted SAP tutorials, tips, and training content.

With  S/4HANA Finance , the universal journal includes a single field account that covers both the general ledger (G/L) account and the cost element. As companies migrate to S/4HANA Finance, the system merges their existing G/L accounts and cost elements.

The transactions for the creation and maintenance of cost elements become obsolete, replaced by a single transaction for account maintenance. However, this technical change does not mean that the idea of a cost element has disappeared with S/4HANA Finance. Learn what changes come with S/4HANA Finance and what remains as before.

Key Concept

The cost element design within the controlling area is a vital part of setting up your controlling (CO) system. In S/4HANA Finance, as the accounts and cost elements are merged, the following changes result:

• The  primary cost elements  represent the  profit-and-loss accounts  used to classify your journal entries. In all accounting approaches, you use cost elements to represent wages and salaries, material expenses, depreciation, and many others. If you use account-based  profitability analysis  (CO-PA) or if you have make-to-order processes requiring results analysis and settlement, you also use cost elements for revenues or sales deductions. In S/4HANA Finance, the G/L account and the primary cost elements merge into one.  
• The  secondary cost elements  record the  value flows  within CO, such as the charging of utility costs from a support cost center to an operational cost center or the charging of machine-hours to a production order. Additional examples include the charging of consulting time to a  Work Breakdown Structure  (WBS) element or the settlement of research and development costs to CO-PA. In S/4HANA Finance, accounts are created for every secondary cost element so that all value flows are visible in the universal journal and thus in reports such as the trial balance.

A Controlling (CO) implementation typically starts with the decision regarding which profit-and-loss (P&L) accounts require primary cost elements and which don’t. There are typically a handful of P&L accounts that do not need to be reflected in CO—either because they have no impact on the operational business or are needed for a particular purpose, such as recording work in process (WIP).

However, for the majority of P&L accounts, the implementation team creates a separate primary cost element for each account. It makes sure that the correct CO account assignment can be updated as each journal entry is posted. This approach allows capturing salary postings by cost center or material expense postings by Work Breakdown Structure (WBS) element.

All these changes with S/4HANA Finance, where the accounts and cost elements merge, and the master data settings for the cost elements become part of the general ledger (G/L) account master.

This means that where you used to create primary cost elements using transaction code KA01, you now are directed to transaction code FS00 (Display G/L Account Centrally). While this all sounds quite radical, the fundamental nature of the account does not change, and you continue to use the field status groups to control which account assignments are valid for each business transaction as before.

The merge of accounts and cost elements does have an impact on your authorization profiles. You can create accounts with no CO impact if you have authorization for G/L account maintenance (these are typically given by account, company code, and account type). However, if you want to create an account that is simultaneously a cost element, you need authorization for both the G/L account and the cost element (authorization object K_CSKB).

The combination also means that you need to keep the period locks in sync and make sure that the account types that allow postings match the CO business transactions that allow postings at any given time.

Setting Up Your Accounts in S/4 HANA Finance

Figure 1  shows the account master data in S/4HANA Finance (transaction code FS00), which is a combination of the account maintenance and the previous cost element maintenance transactions (transaction code KA01-3).

Figure 1: G/L account showing the account type for the primary cost element

The main change to this screen is that you can choose between P&L accounts that do not require a cost assignment by selecting the account type Nonoperating Expense or Income and P&L accounts that are associated with a CO account assignment by selecting the Account Type Primary Costs or Revenue.

In my example, you have a raw material expense account, and any raw material posting to this account needs to be assigned to a CO account, such as a cost center, order, or WBS element. If you are migrating, your field status groups will already be set up to include these CO account assignments.

As you go through the screens, notice that the old Default Assignment tab in the cost element master record is gone, so the only way to set up the default account assignments is to use transaction code OKB9 or follow IMG menu path Controlling > Cost Center Accounting > Actual Postings > Manual Actual Postings > Edit Account Assignment. If you have entered default account assignments in your cost element master data, the migration process creates entries in table TKA3A for these default assignments. You can check them using transaction code OKB9.

The account type alone does not define how the account is used in CO. This is done by assigning a cost element category to each account. To check the cost element category, select the Control Data tab as shown in  Figure 2 .

In this tab, you see that your raw material account has the cost element category 1 (Primary costs/cost reducing revenues). (This value appears in the CElem category field.) You want similar accounts or cost elements for wages and salaries, asset depreciation, material movements, and many others.

You can also use cost elements of category 3 and 4 if you work with accrual postings. If you are using account-based profitability analysis (CO-PA), you also want cost elements of category 11 for revenue and category 12 for sales deductions.

You also use these cost element categories if you have make-to-order processes requiring results analysis, where revenue or direct costs are assigned to a project or sales order. If you have settlement processes that capitalize expenses as either asset under construction or finished goods inventory, you also want cost elements of category 22 for external settlement.

Note that the old restriction that WIP accounts must not be cost elements continue to apply (in other words, the account type for the WIP offsetting entry must be Nonoperating Expense or Income).

With the settings for the primary cost elements made to the relevant accounts, it’s time to think about the secondary cost elements. Before I go into detail here, it’s worth recalling how a primary cost element differs from a secondary cost element. A primary cost element is an extension of a P&L account, and the offsetting entry is always to a balance sheet account (so a salary expense will offset to accounts payable, a revenue posting will offset to accounts receivable, and so on).

A posting to a secondary cost element balances to zero, but under the same account. Hence, a direct activity allocation credits the cost center and debits the order under the same cost element.

The switch is in the sender (here cost center) and the receiver (the order), and this, in turn, may trigger a shift in profit centers or functional areas, all of which are captured as partner relationships in the universal journal.

In the past, secondary cost elements were created using transaction code KA06, but in S/4HANA Finance, you again are redirected to transaction code FS00 (Display G/L Account Centrally). During migration, secondary cost elements are migrated into the G/L account tables (SKA1, SKB1, and SKAT) for all company codes assigned to the CO area.  Figure 3  shows the G/L account master data for a secondary cost element for the allocation of machine costs.

Again, you can see the cost element categories by selecting the Control Data tab.  Figure 4  shows that this cost element can be used for internal activity allocations (in other words, to charge machine costs from a cost center to orders or projects).

As you think about your secondary cost element categories, think about these sender-receiver relationships. These relationships give you a cost element category of 43 for internal activity allocation (as shown in  Figure 4 ), 21 for internal settlement, 41 for overhead rates, and 42 for assessment. You’ll see an example of such a sender-receiver relationship and the associated value flow when I explain how a secondary cost element appears in the trial balance at the end of this article.

If you’ve been working with the classic General Ledger, these movements are recorded in the reconciliation ledger if they cross-company code boundaries and are moved to the classic General Ledger at the period close using transaction code KALC. If you’ve been working with the SAP General Ledger, you probably have set up real-time integration to create journal entries for these movements. Both these approaches are obsolete in S/4HANA Finance.

You always see such movements reflected in the universal journal so that you won’t need a reconciliation ledger. Because the secondary cost elements are now G/L accounts, you won’t need to map the CO business transactions to reconciliation accounts in FI.

The secondary cost elements appear in your financial accounts whenever you perform the transactions listed above, provided that you include the new accounts in your financial statement versions. You can find the link by clicking the Edit financial statement version button shown in the ribbon in  Figure 4 .

If you are building up your financial statement version from scratch, you can still use transaction code KA23 (Cost Elements: Master Data List) to list all the cost elements and their attributes in your system. This makes grouping them for reporting purposes much easier than trying to use the F4 help.

Other secondary cost elements exist that don’t represent such sender-receiver relationships. If you work with Result Analysis, you still need cost elements of type 31 (order/project results analysis). If you are working with Project System, you still potentially need cost elements of types 50, 51, 52 (project-related incoming orders), and 61 (earned value).

Working with Accounts and Cost Elements in S/4 HANA Finance

Figure 5  shows a sample trial balance in S/4HANA Finance. You see the classic view showing the balances by company code and account on the right, but also the option to drill-down by Account Type, Accounting Document, and Activity Type on the left.

This view enables you to drill down by account type (material, asset, vendor, customer) in Financial Accounting but also by activity type (for example, the machine hours that are allocated using the account or cost element shown in  Figures 3  and  4 ) in CO. This same merge is available in all-new financial reports in S/4HANA Finance.

However, while the accounts and cost elements are merged in the new reports, you continue to see the term cost element on many of the screens. You find the term cost element in the assessment cycles, the settlement profiles, the costing sheets, and other areas. These configuration transactions work exactly as before.

You can use the example shown in  Figures 3  and  4  to perform time recording or order confirmations via the work center. You can enter only accounts of cost element category 41 in your costing sheets and accounts of cost element category 42 in your assessment cycles, and so on.

What’s important is that your secondary cost elements provide the transparency you need for your analysis. Mainly if you’ve only worked with costing-based CO-PA in the past, there is a tendency to allocate and settle under a single cost element and rely on the value fields to give you the detail you need for reporting. You may want to create separate secondary cost elements to distinguish between marketing expenses and sales and administration expenses in your assessment cycles.

In  Figure 6 , for example, select the account for raw material costs that you looked at in  Figures 1  and  2  within the trial balance ( Figure 5 ) and drill down by cost center to show all the cost centers to which raw materials were posted within the selected time frame.

By comparison, in  Figure 7 , a more classic approach is taken in which the cost center line-item report transaction code KSB1) is used to select all postings to the raw material cost element with these cost centers in the same time frame.

What’s happening here is that the system is using compatibility views to simulate the existence of CO line items even though the CO data has been subsumed in the universal journal. This means that you won’t need to rework your existing reports after migration to S/4HANA Finance.

Indeed, if you use the relationship browser in the CO line-item display, you find it appears to show an accounting document and a controlling document. However, both documents are views on the universal journal that display the data as if the old structures still existed. You could continue to explore the trial balance, focusing on single accounts, such as raw materials and selecting other account assignments (such as orders and projects) or looking at different accounts, such as revenue accounts and drilling down to the CO-PA characteristics.

Instead, look at the account for the secondary cost element in  Figures 3  and  4 , then drill down to the sender and receiver objects that were updated during these postings.

In  Figure 8 , note that you’ve drilled down to the sender cost center (1303) and the sender activity type (1420), which gives you a credit balance. The offsetting line is a debit balance. To see the account assignment, you have to pull the order number by choosing the appropriate option in the navigation panel. This is a straightforward example, but it gives you an impression of the fundamental changes available with S/4HANA Finance.

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What is Cost Element Accounting in SAP | SAP CO-CEL

What is sap cost element accounting.

In SAP, cost element accounting (CO-OM-CEL) deals with the collection of costs and summarizes costs within controlling and posts to reconciliation ledger account. For every profit & loss type G/L account type, corresponding cost elements are to be created in SAP R/3 system.

What are cost elements?

Cost element is an item in the chart of accounts, which is used in controlling area to record the values assigned consumption of production factors like raw material, utilities, etc. cost elements are divided in to two types i.e.

• Primary Cost / Revenue Elements

Secondary Cost Elements

Primary Cost Elements: –

Primary cost elements describes the costs that occurs outside of controlling. It links to SAP financial accounting (FI) expenses account (corresponding to G/L account required for costs). When you are creating new primary cost elements, the SAP check if a corresponding accounts are available in SAP Financial accounting .

Cost Element Categories: –  You need to assign a particular cost element category when you are implementing cost element accounting in SAP.

• 01 – Primary costs / cost reducing revenues
• 11 – Revenues
• 12 – Sales deductions

It describes the costs flows that occurs only within controlling like allocations, overhead cost calculations, etc. No link to SAP FI expense accounts.

Secondary Cost element category: – Similarly you need to assign a cost element category when you are creating secondary cost elements. Some of the important secondary cost element category are

• 01 – Internal Settlements
• 31 – Order/ Project results analysis
• 41 – Overhead
• 42 – Assessment
• 43 – Internal activity allocation

SAP Cost Element Accounting (CO-CEL) Configuration

The primary configuration of cost element accounting in SAP involve maintenance of cost element master data and information system.

The important configuration steps of SAP CO-CEL are

• Creation of primary cost elements
• Creation of secondary cost elements
• Creation of cost element group
• SAP CO/FI reconciliation in company code currency
• Cost element master data reports.

Also read: what is cost center accounting in SAP .

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Differentiating Between Cost Centers and Simple Projects

After completing this lesson, you will be able to:

• Compare the usage of cost centers and simple projects

Projects and WBS Elements

Lesson overview.

In this lesson, you will learn about the use of work breakdown structure elements (WBS elements) to structure projects, as well as why you may use them in addition to cost centers.

Distinction and Link Between Project and WBS Elements

You previously identified the usage of cost centers when tracking overhead cost information. In the SAP S/4HANA system, projects can also be used to manage overhead costs.

Let’s find out which contexts the projects apply to. Why use another cost object? For what kind of analysis? When do you use cost centers and when do you use simple projects?

When costs and revenues need to be followed up with a more horizontal approach , you should prefer to track costs and revenues by project . Often it makes sense to break the work of this project into multiple separate tasks and to set up a hierarchy for them: a transversal work breakdown structure (WBS) .

A project can consist of multiple WBS elements or only one in the case of simple projects.

Cost Assignment: Cost Center or WBS Element?

Now that you know what a WBS element is, let's look at the main differences between WBS elements and cost centers.

For this, navigate through the following table:

You now know that WBS elements represent discrete parts of the work linked to a project. They are used as cost objects each time you need to gather costs and revenues from a specific task related to a project.

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Cold weather pay offered to incentivize assignments to North Dakota bases

WASHINGTON (KMOT) – Airmen from other parts of the country sometimes lament assignments in North Dakota due to the cold winters, but the Air Force is starting a new incentive program for servicemembers who have to “come North.”

The Air Force is rolling out a special cold weather duty pay for airmen and guardians assigned to bases where the temperature can drop below -20 degrees Fahrenheit.

This includes Minot Air Force Base, Grand Forks Air Force Base and Cavalier Space Station.

The idea is to help offset the costs of cold-weather items, such as gear, snow tires, engine block heaters and emergency kits for your car.

Pay will begin July 1, and the Air Force will announce specifics on pay amounts closer to the date.

Both North Dakota Senators John Hoeven and Kevin Cramer, along with Alaska Senators Lisa Murkowski and Dan Sullivan, recently sent a letter to the Secretary of the Air Force to implement the program.

Copyright 2024 KFYR. All rights reserved.

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