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What is a cost object? Why is it important? Give an example of a cost object?
A cost object is:
-Any item or activity for which a separate measurement of cost is desired.
-Anything that causes an organization to incur costs.
It's important because:
-it helps to see if costs are reasonable
-it helps to derive pricing from a baseline cost
-it helps to derive the full cost of a relationship with another entity
Examples of a cost object are:
-consulting services
-customers when the cost of selling or delivering is known
-project design costs
Any Item or activity
What is a Cost unit? What is its importance? What are the examples of cost unit?
Is a physical measure of a product or service in relation to which costs are determined and ascertained.
-it identify z and analyzes a company s unit cost to check if it's producing a product efficiently.
-it's a focal point for allocating costs as they are incurred.
Examples are:
-school>lecturer/student
-hospital>patient/doctor
Examples of a cost unit are:
Physical measure of a product or service
What is a Cost Center? Why is it important? What are the examples?
-Is a production or service location,a function,an activity or an item of equipment for which costs are accumulated.
-a collecting place for costs before they are analyzed further.
It is important because:
-it keeps close track of expenses of operating a cost center by allowing the organization to control total costs.
-it allocates resources more strategically & calculates profitability on a product or departmental basis.
Examples of a cost are:
-a project
-customer service
-a department e.g accounting department
-a machine/group of machines
A production/service location
What is a variable cost? Why they are important?what is an example of a variable cost?
Costs which vary in direct proportion to changes in volume or level of activity.
-They significant they help understand the effect on total costs of increasing production and determination of prime costs of products.
-help managers meet targets and goals of the business as the goals are linked to financial aspects of revenue and profit
Examples are: fuel costs, direct material costs
They change with activity
What is a fixed cost?why are they important?give examples
Costs that remain constant and unchanged when the activity level or volume changes for specific period of time.
They are important because:
-they help organizations in determining costs which are relevant for decision making
-they help organizations plan identify and analyze costs which may still be incurred even when there are no activities taking place in the organization.
-Rent
-Salary of an employee
What is a mixed cost?why is it important?give examples
A cost which contains both fixed and variable elements of cost.
-they help companies plan output levels of production because they may limit profitability and erode a companies bottom line.
Salary and commission of a sales representative
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