BUSINESS ADMINISTRATION
ACCOUNTING FOR MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Indirect costs are always traced
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The design of operations affects the direct/indirect classification
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Indirect costs are always allocated
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The direct/indirect classification depends on the choice of cost object
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Detailed explanation-1: -A budgeted profit for the next year will not impact the current year’s classification as the latter will be a historical cost.
Detailed explanation-2: -Indirect costs, or overheads, are operating expenses that are not directly traceable to a single product, service or other specific cost object. Instead, indirect costs affect several cost objects, or support the overall company operations, such as administrative, insurance or utilities expenses.
Detailed explanation-3: -The correct answer is: 4) Direct costs can be traced easily to a cost object, but indirect costs cannot be easily traced to a cost object.
Detailed explanation-4: -“Indirect costs” are those that cannot be directly traced to a single cost object. Because they cannot be traced directly to a specific cost object, indirect costs must instead be allocated to all of the products they are used to produce.