1. The term “cost” is simply puzzling to people who do not have
Explain the following
(a) Cost Driver
(b) Cost Function
(c) Cost Object
Examples of Cost Drivers
In accounting cost driver is a factor that incurs cost, based on the activity of the cost driver, the cost driver rate is identified at which indirect costs are allocated to production activities.
2. Cost Function – It’s a mathematical formula used to predict the cost associated with a certain action or certain level of output. It is used to forecast cost and expenses associated in production, to determine the pricing strategies to achieve desired profit. Management uses it to run different production scenarios and help predict what the total cost would be to produce a product at different levels of output. The cost function is expressed as C(x) = Fixed Cost + V(x)
Where is C(x) is total cost of production and V(x) is the variable cost of the production.
3. Cost Object – A cost object is the product or a department for which the cost is accumulated and measured. For example, a product is the cost object for direct material, Direct Labor and Manufacturing Overhead. The factory maintenance department is the cost object for cost of employees in maintenance department and maintenance related supplies. A cost object can also be a batch of product, a customer, a machine or group of it or a group of employees etc.