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Selected Cost-Accounting Concepts
Cost allocation is part of cost accounting, and it is built upon many related concepts. The follow-
ing sections introduce these concepts, including cost object, management centers, direct versus
indirect costs, cost pools, and allocation bases.
Cost Accounting and Cost Objectives
Cost accounting is the process of valuing the overall costs of producing a good or providing a
service. Cost accounting is a complex process of collecting, analyzing, summarizing, and allocat-
ing costs to a
ive at the full cost. Cost accounting is for management decision-making and con-
trol purposes; therefore, there is usually no need for the information from one organization to be
comparable to that of other organizations. As a result, there is a wide range of cost-accounting
systems for different companies, governments, and other public and nonprofit organizations.
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In cost accounting, an anchoring concept is the cost object, also called the cost objective.
A cost object is a product or service for which we want to find the full or total cost. A cost object
TI is any organization's unit of activity for which a separate measurement of costs must be in place.
S The cost to run a department, the cost to produce a product, and the cost to provide a service are
& all examples of cost objects.
yd Program and Service Centers
As alluded to in the previous section, government departments can be classified into program
nN centers and support centers. City fire departments, police departments, park services depart-
ments, and sanitation departments are typical program centers, as they provide services to the
city residents directly. City executive offices, the city council, human resources departments,
financial management departments, and information technology (IT) departments are all exam-
ples of service departments and support centers, which are necessary for the operation of the
program departments of a local government but do not provide services directly to the public.
The costs of these internal services departments need to be allocated to program departments to
a
ive at the full cost of government services.
Direct Versus Indirect Costs
Direct costs are those that can be traced to a specific cost object. For instance, labor and mate-
ials used for park services are direct costs for the cost object. Indirect costs are not readily
identifiable with a particular cost object but are necessary for the operation of the organization
and the services/programs it provides. In this instance, indirect costs could include the salary of
a supervisor who supervises more than park services or a commissioner who is responsible fo
other cost objects. Indirect costs benefit more than one cost object, and the precise amount of
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and the services/programs it provides. In this instance, indirect costs could include the salary of
a supervisor who supervises more than park services or a commissioner who is responsible fo
other cost objects. Indirect costs benefit more than one cost object, and the precise amount of
costs used to benefit a specific cost object are often difficult to trace.
For example, what are all the costs, direct and indirect, of a college classroom? Name them:
m Professor's salary
m Supplies such as markers, chalk, and pape
m Equipment, such as computers and a projecto
These costs are directly related to the cost object, the classroom. But there are other costs:
m Maintenance and cleaning staff
m Utilities
m College administration
These are indirect costs. They are difficult to measure relative to this cost object, but they are
necessary for the classroom to run effectively. The salaries of executives who oversee a numbe
of cost centers are often not directly linked to one particular center, but they are necessary costs
for the organization to be able to run itself and subsequently provide its services, at least ove
the long run. One could argue that it’s possible to estimate direct executive costs for a cost cen-
ter by recording the time that an executive spends on the cost center and then multiplying the
proportion of the executive's time spent there by his or her total compensation. But the cost of
time involved in doing this tracking can easily exceed the value of the increased accuracy of the
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