accounting assignment 494996

CHAPTER Cost Classifications 6 DISTINCTION BETWEEN DIRECT AND Progress Notes INDIRECT COSTS Direct costs can be specifically associated with a particular After completing this chapter, unit or department or patient. The critical distinction for you should be able to the manager is that the cost is directly attributable. What- ever the manager is responsible for—that is, the unit, the 1. Distinguish between direct and department, or the patient—is known as a cost object. indirect costs. The somewhat vague definition of a cost object is any unit for which a separate cost measurement is desired. It 2. Understand why the difference might help the manager to think of a cost object as a cost ob- is important to management. 1 jective instead. The important thing is that direct costs 3. Understand the composition can be traced. Indirect costs, on the other hand, cannot be specifically associated with a particular cost object. and purpose of responsibility The controller’s office is an example of indirect cost. centers. The controller’s office is essential to the overall organi- 4. Distinguish between product zation itself, but its cost is not specifically or directly asso- ciated with providing healthcare services. The critical and period costs. distinction for the manager is that indirect costs usually cannot be traced, but instead must be allocated or ap- 2 portioned in some manner. Figure 6-1 illustrates the direct–indirect cost distinction. To summarize, it is helpful to recognize that direct costs are incurred for the sole benefit of a particular op- erating unit—a department, for example. As a rule of thumb, if the answer to the following question is “yes,” then the cost is a direct cost: “If the operating unit (such as a department) did not exist, would this cost not be in existence?” Indirect costs, in contrast, are incurred for the overall operation and not for any one unit. Because they are shared, indirect costs are sometimes called joint costs or 4950 CHAPTER…