Question

Cost Accounting 8th Canadian Edition

If a cost can be traced directly to its cost object, why might a company choose not to trace but to include that cost in the indirect cost category and allocate on some arbitrary basis? Explain the advantage and disadvantage of tracing versus not tracing.

Answer 1

Ques. If a cost can be traced directly to its cost object, why might a company choose not to trace but to include that cost in the indirect cost category and allocate on some arbitrary basis? Explain the advantage and disadvantage of tracing versus not tracing.

Ans. Company choose not to trace but to include that cost in the indirect cost category and allocate on some arbitrary basis because some costs are commonly incurred in factory. Like factory produces three products then there would be some costs that could not be allocated to specific products which need to be distributed among all the products on some reasonable basis. Electricity, common working staff, rent of factory, overheads, etc could be some examples of this types of costs. Direct costs are always allocated directly to products like direct material, direct labor costs.

Advantage of tracing versus not tracing

Tracing gives the true picture of costs of specific products produced and in return the correct profits earned by specific products. Besides profits, tracing also gives the management idea about where the product cost is incurred excess than required. That means which portion of product costs company needs to control to increase profits. Tracing also gives idea to management of where it can increase product quality by incurring more costs. So, it has numerous advantages

Disadvantage of tracing versus not tracing.

disadvantages of tracing the costs are negligible. Prime disadvantage is that tracing the costs also requires company to incur cost to prepare data to trace the cost. Another disadvantage is the fact that much of staff time is taken in this process of tracing costs. This process is continuous, that means costs keep on altering. So you need to do tracing on regular basis to allocate costs to specific product.