Building-Block Concepts of Costing System

It’s a good practice to define the common terminology to be used before setting up any system. This not only keep the communication aligned but also the documentation for authentication. For e.g. What we generally call Master File and Transaction File in setting up an ERP system, IT professionals will refer them as Fact Table and Dimension Table (also DIM Table) respectively.

Building-Block of any system is like Walk-The-Talk of living a credible life.

Here are the building-blocks of Costing System:

1.  Cost Object—anything for which measurement of costs is desired

2.  Direct costs of a cost object—costs related to a particular cost object that can be traced to that cost object in an economically feasible way—for e.g. raw materials costs

3.  Indirect costs of a cost object—costs related to a particular cost object that cannot be traced to that cost object in an economically feasible way—for e.g. costs of plant manager who oversee multiple products being manufactured, rent paid for common maintenance facility

4.    Cost Assignment—is a general term for assigning costs, whether direct or indirect (include both variable and fixed costs as well)

5.  Cost Tracing—is a specific term for assigning direct costs

6.  Cost Allocation—refers to assigning indirect costs

7.  Cost Pool—is a grouping of individual indirect cost items. Cost Pools are often organized in conjunction with cost-allocation bases

8.  Cost Driver—a variable, such as the level of activity or volume, that causally (cause-and-effect relationship) costs over a given time period

9.  Cost-Allocation Base—is a systematic way to link indirect costs to a cost object. Companies generally use cost-driver of indirect costs as the cost-allocation base

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