what is definition of cost assignment

What is Cost Assignment?

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Cost assignment.

Cost assignment is the process of associating costs with cost objects, such as products, services, departments, or projects. It encompasses the identification, measurement, and allocation of both direct and indirect costs to ensure a comprehensive understanding of the resources consumed by various cost objects within an organization. Cost assignment is a crucial aspect of cost accounting and management accounting, as it helps organizations make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

There are two main components of cost assignment:

• Direct cost assignment: Direct costs are those costs that can be specifically traced or identified with a particular cost object. Examples of direct costs include direct materials, such as raw materials used in manufacturing a product, and direct labor, such as the wages paid to workers directly involved in producing a product or providing a service. Direct cost assignment involves linking these costs directly to the relevant cost objects, typically through invoices, timesheets, or other documentation.
• Indirect cost assignment (Cost allocation): Indirect costs, also known as overhead or shared costs, are those costs that cannot be directly traced to a specific cost object or are not economically feasible to trace directly. Examples of indirect costs include rent, utilities, depreciation, insurance, and administrative expenses. Since indirect costs cannot be assigned directly to cost objects, organizations use various cost allocation methods to distribute these costs in a systematic and rational manner. Some common cost allocation methods include direct allocation, step-down allocation, reciprocal allocation, and activity-based costing (ABC).

In summary, cost assignment is the process of associating both direct and indirect costs with cost objects, such as products, services, departments, or projects. It plays a critical role in cost accounting and management accounting by providing organizations with the necessary information to make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

Example of Cost Assignment

Let’s consider an example of cost assignment at a bakery called “BreadHeaven” that produces two types of bread: white bread and whole wheat bread.

BreadHeaven incurs various direct and indirect costs to produce the bread. Here’s how the company would assign these costs to the two types of bread:

• Direct cost assignment:

Direct costs can be specifically traced to each type of bread. In this case, the direct costs include:

• Direct materials: BreadHeaven purchases flour, yeast, salt, and other ingredients required to make the bread. The cost of these ingredients can be directly traced to each type of bread.
• Direct labor: BreadHeaven employs bakers who are directly involved in making the bread. The wages paid to these bakers can be directly traced to each type of bread based on the time spent working on each bread type.

For example, if BreadHeaven spent $2,000 on direct materials and $1,500 on direct labor for white bread, and $3,000 on direct materials and $2,500 on direct labor for whole wheat bread, these costs would be directly assigned to each bread type.

• Indirect cost assignment (Cost allocation):

Indirect costs, such as rent, utilities, equipment maintenance, and administrative expenses, cannot be directly traced to each type of bread. BreadHeaven uses a cost allocation method to assign these costs to the two types of bread.

Suppose the total indirect costs for the month are $6,000. BreadHeaven decides to use the number of loaves produced as the allocation base , as it believes that indirect costs are driven by the production volume. During the month, the bakery produces 3,000 loaves of white bread and 2,000 loaves of whole wheat bread, totaling 5,000 loaves.

The allocation rate per loaf is:

Allocation Rate = Total Indirect Costs / Total Loaves Allocation Rate = $6,000 / 5,000 loaves = $1.20 per loaf

BreadHeaven allocates the indirect costs to each type of bread using the allocation rate and the number of loaves produced:

• White bread: 3,000 loaves × $1.20 per loaf = $3,600
• Whole wheat bread: 2,000 loaves × $1.20 per loaf = $2,400

After completing the cost assignment, BreadHeaven can determine the total costs for each type of bread:

• White bread: $2,000 (direct materials) + $1,500 (direct labor) + $3,600 (indirect costs) = $7,100
• Whole wheat bread: $3,000 (direct materials) + $2,500 (direct labor) + $2,400 (indirect costs) = $7,900

By assigning both direct and indirect costs to each type of bread, BreadHeaven gains a better understanding of the full cost of producing each bread type, which can inform pricing decisions, resource allocation, and performance evaluation.

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Module 5: Job Order Costing

Introduction to accumulating and assigning costs, what you will learn to do: assign costs to jobs.

Financial and managerial accountants record costs of production in an account called Work in Process. The total of these direct materials, direct labor, and factory overhead costs equal the cost of producing the item.

In order to understand the accounting process, here is a quick review of how financial accountants record transactions:

Let’s take as simple an example as possible. Jackie Ma has decided to make high-end custom skateboards. She starts her business on July 1 by filing the proper forms with the state and then opening a checking account in the name of her new business, MaBoards. She transfers $150,000 from her retirement account into the business account and records it in a journal as follows:

For purposes of this ongoing example, we’ll ignore pennies and dollar signs, and we’ll also ignore selling, general, and administrative costs.

After Jackie writes the journal entry, she posts it to a ledger that currently has only two accounts: Checking Account, and Owner’s Capital.

Debits are entries on the left side of the account, and credits are entries on the right side.

Here is a quick review of debits and credits:

You can view the transcript for “Colin Dodds – Debit Credit Theory (Accounting Rap Song)” here (opens in new window) .

Also, this system of debits and credits is based on the following accounting equation:

Assets = Liabilities + Equity.

• Assets are resources that the company owns
• Liabilities are debts
• Equity is the amount of assets left over after all debts are paid

Let’s look at one more initial transaction before we dive into recording and accumulating direct costs such as materials and labor.

Jackie finds the perfect building for her new business; an old woodworking shop that has most of the equipment she will need. She writes a check from her new business account in the amount of $2,500 for July rent. Because she took managerial accounting in college, she determines this to be an indirect product expense, so she records it as Factory Overhead following a three-step process:

• Analyze transaction

Because her entire facility is devoted to production, she determines that the rent expense is factory overhead.

2. Journalize transaction using debits and credits

If she is using QuickBooks ® or other accounting software, when she enters the transaction into the system, the software will create the journal entry. In any case, whether she does it by hand or computer, the entry will look much like this:

3. Post to the ledger

Again, her computer software will post the journal entry to the ledger, but we will follow this example using a visual system accountants call T-accounts. The T-account is an abbreviated ledger. Click here to view a more detailed example of a ledger .

Jackie posts her journal entry to the ledger (T-accounts here).

She now has three accounts: Checking Account, Owner’s Capital, and Factory Overhead, and the company ledger looks like this:

In a retail business, rent, salaries, insurance, and other operating costs are categorized into accounts classified as expenses. In a manufacturing business, some costs are classified as product costs while others are classified as period costs (selling, general, and administrative).

We’ll treat factory overhead as an expense for now, which is ultimately a sub-category of Owner’s Equity, so our accounting equation now looks like this:

Assets = Liabilities + Owner’s Equity

147,500 = 150,000 – 2,500

Notice that debits offset credits and vice versa. The balance in the checking account is the original deposit of $150,000, less the check written for $2,500. Once the check clears, if Jackie checks her account online, she’ll see that her ledger balance and the balance the bank reports will be the same.

Here is a summary of the rules of debits and credits:

Assets = increased by a debit, decreased by a credit

Liabilities = increased by a credit, decreased by a debit

Owner’s Equity = increased by a credit, decreased by a debit

Revenues increase owner’s equity, therefore an individual revenue account is increased by a credit, decreased by a debit

Expenses decrease owner’s equity, therefore an individual expense account is increased by a debit, decreased by a credit

Here’s Colin Dodds’s Accounting Rap Song again to help you remember the rules of debits and credits:

Let’s continue to explore job costing now by using this accounting system to assign and accumulate direct and indirect costs for each project.

When you are done with this section, you will be able to:

• Record direct materials and direct labor for a job
• Record allocated manufacturing overhead
• Prepare a job cost record

Learning Activities

The learning activities for this section include the following:

• Reading: Direct Costs
• Self Check: Direct Costs
• Reading: Allocated Overhead
• Self Check: Allocated Overhead
• Reading: Subsidiary Ledgers and Records
• Self Check: Subsidiary Ledgers and Records
• Introduction to Accumulating and Assigning Costs. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution
• Colin Dodds - Debit Credit Theory (Accounting Rap Song). Authored by : Mr. Colin Dodds. Located at : https://youtu.be/j71Kmxv7smk . License : All Rights Reserved . License Terms : Standard YouTube License
• What the General Ledger Can Tell You About Your Business. Authored by : Mary Girsch-Bock. Located at : https://www.fool.com/the-blueprint/general-ledger/ . License : All Rights Reserved . License Terms : Standard YouTube License

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COST ASSIGNMENT Definition

COST ASSIGNMENT involves assigning costs of an account to the accounts that are responsible or accountable for incurring the cost. For example, the cost of issuing purchase orders is allocated to the various objects procured. The cost assignment is done through assignment paths and cost drivers. The assignment path identifies the source account (the account whose cost is being assigned "Issue Purchase Orders" in the above example) and destination accounts (the accounts to which the costs are being allocated the various cost objects procured by issuing purchase orders in the above example). The cost driver identifies the measure or rationale on the basis of which the assignment needs to be done, that is, whether the costs of issuing purchase orders need to be assigned to various cost objects evenly, based on some defined percentage values, or based on some criterion, like the number of purchase orders of each cost object issued. Defining the cost drivers and assignment paths (i.e., source and destination accounts) enable proper assignment and accounting of the various costs incurred in the organization.

Learn new Accounting Terms

LIQUIDATOR is a person appointed by a court of law or unsecured creditors who liquidates assets or preserves them for the benefit of affected parties.

CONTRACTUAL ALLOWANCE, in healthcare, is the difference between what hospitals bill and what they receive in payment from third party payers, most commonly government programs; also known as contractual adjustment.

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Related overviews.

cost centre

absorption costing

cost allocation

cost tracing

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cost assignment

Quick reference.

The procedures by which direct or indirect costs are charged to or made the responsibility of particular cost centres, and ultimately charged to the products manufactured or services provided by the organization. Procedures used to achieve cost attribution include absorption costing, activity-based costing, marginal costing, and process costing. See also cost allocation; cost tracing.

From:   cost assignment   in  A Dictionary of Accounting »

Subjects: Social sciences — Business and Management

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What Is Cost Allocation?

Table of Contents

For your business to make money, you must charge prices that not only cover your expenses, but also provide a profit. Cost allocation is the process of identifying and assigning costs to the cost objects in your business, such as products, a project, or even an entire department or individual company branch.

While a detailed cost allocation report may not be vital for extremely small businesses, such as a teen’s lawn service, more complex businesses require the process of cost allocation to ensure profitability and productivity.

In short, if you can assign a cost to any part of your business, it’s considered a cost object.

What is cost allocation?

Cost allocation is the method business owners use to calculate profitability for the purpose of financial reporting . To ensure the business’s finances are on track, costs are separated, or allocated, into different categories based on the area of the business they impact.

For instance, cost allocation for a small clothing boutique would include the costs of materials, shipping and marketing. Calculating these costs consistently would help the store owner ensure that profits from sales are higher than the costs of owning and running the store. If not, the owner could easily pinpoint where to raise prices or cut expenses .

For a larger company, this process would be applied to each department or individual location. Many companies use cost allocation to determine which areas receive bonuses annually.

Regardless of your business size, you’ll want to review and choose the best accounting software to help this process run as smoothly as possible.

Types of costs

In the boutique example above, the process of cost allocation is pretty simple. For larger businesses, however, many more costs are involved. These costs break down into seven categories.

• Direct costs: These expenses are directly related to a product or service. In your business’s financial statements, these costs can be linked to items sold. For a small clothing store, this might include the cost of inventory.
• Direct labor: This cost category includes expenses directly related to the employee production of items or services your business sells. Direct labor costs include payroll for employees involved in making the items your business sells.
• Direct materials: As the name suggests, this category includes costs related to the resources used to manufacture a finished product. Direct materials include fabric to make clothing, or the glass used in building tables.
• Indirect costs: These expenses are not directly related to a product or service, but necessary to create the product or service. Indirect costs include payroll for those who work in operations. It also lists costs for materials you use in such small quantities that their costs are easy to overlook.
• Manufacturing overhead: This category includes warehouse costs, and any other expenses directly related to manufacturing the products sold. Manufacturing overhead costs include payroll for warehouse managers, as well as warehouse expenses such as rent and utilities.
• Overhead costs: These include expenses that support the company as a whole but are not directly related to production. Some examples of overhead costs are marketing, operations and utilities for a storefront.
• Product costs: Also called “manufacturing costs” or “total costs,” this category includes expenses for making or acquiring the product you sell. All manufacturing overhead costs are also listed in this category.

Example of cost allocation

To better explain the process of cost allocation and why it’s necessary for businesses, let’s look at an example.

Dave owns a business that manufactures eyeglasses. In January, Dave’s overhead costs totaled $5,000. In the same month, he produced 3,000 eyeglasses with $2 in direct labor per product. Direct materials for each pair of eyeglasses totaled $5.

Here’s what cost allocation would look like for Dave:

Overhead: $5,000 ÷ $3,000 = $1.66 per pair

Direct costs:

• Direct materials: $5 per pair
• Direct labor: $2 per pair
• Overhead: $1.66 per pair
• Total cost: $8.66 per pair

As you can see, without cost allocation, Dave would not have made a profit from his sales. Larger companies would apply this same process to each department and product to ensure sufficient sales goals. [Read related article: How to Set Achievable Business Goals ]

How to allocate costs

Cost objects vary by business type. The cost allocation process, however, consists of the same steps regardless of what your company produces.

1. Identify cost objects.

To begin allocating costs, you’ll need to list the cost objects of your business. Remember that anything within your business that generates an expense is a cost object. Review each product line, project and department to ensure you’ve gathered all cost objects.

2. Create a cost pool.

Next, gather a detailed list of all business costs. It’s a good idea to categorize the costs based on the reason for each amount. Categories should cover utilities, insurance , square footage and any other expenses your business incurs.

3. Allocate costs.

Now that you’ve listed cost objects and created a cost pool, you’re ready to allocate costs. As demonstrated in the example above, add up the costs of each cost object. At a glance, your report should justify all expenses related to your business. If costs don’t add up correctly, use the list to determine where you can make adjustments to get back on track.

What is cost allocation used for?

Cost allocation is used for many reasons, both externally and internally. Reports created by this process are great resources for making business decisions , monitoring productivity and justifying expenses.

External reports are usually calculated based on generally accepted accounting principles (GAAP) . Under GAAP, expenses can only be reported in financial statements during the time period the associated revenue is earned. For this reason, overhead costs are divided and allocated to individual inventory items. When the inventory is sold, the overhead is expensed as a portion of the cost of goods sold (COGS) .

Internal financial data, on the other hand, is usually reported using activity-based costing (ABC). This method assigns all products to the overhead expenses they caused. This process may not include all overhead costs related to operations and manufacturing.

Cost allocation reports show which cost objects incur the most expenses for your business and which products or departments are most profitable. These findings can be a great resource to pair with employee monitoring software when evaluating productivity. If you determine that a cost object is not as profitable as it should be, you should do further evaluations on productivity. If another cost object is found to exceed expectations, you can use the report to find staff members who deserve recognition for their contributions to the company.

Recognition is one of the best ways to keep employees motivated .

What is a cost driver?

A cost driver is a variable that can change the costs related to a business activity. The number of invoices issued, the number of employee hours worked, and the total of purchase orders are all examples of cost drivers in cost accounting .

While cost objects are related to the specific process or product incurring the costs, a cost driver sheds light on the reason for the incurred cost amounts. These items can take different forms – including fixed costs, such as the initial fees during the startup phase . Cost drivers give a bird’s-eye view of the entire company and how each department operates.

It’s common for only one cost driver to be used with very small businesses , since they are focused on using minimal reporting to estimate overhead costs.

Benefits of cost allocation

• It simplifies decision-making. Cost allocation gives you a detailed overview of how your business expenses are used. From this perspective, you can determine which products and services are profitable, and which departments are most productive.
• It assists in staff evaluation. You can also use cost allocation to assess the performance of different departments. If a department is not profitable, the staff productivity may need improvement. Cost allocation can also be an indicator of departments that exceed expectations and deserve recognition. Awards and recognition are a great way to motivate staff and, in turn, increase productivity. [Read related article: Best Business Productivity Apps ]

Even if you operate a very small business, it’s a great idea to learn the process of cost allocation, especially if you anticipate expansion in the future. Since the method can be complex, it’s ideal to use accounting software as an aid. Whether you choose to start allocating costs on your own with software or hire a professional accountant , it’s a process no business owner can afford to overlook.

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Understanding Cost Objects – What They Are and Why They Matter

Businesses must clearly understand their costs as they strive to make informed financial decisions. One tool that companies use to track and manage their costs is cost objects.

But what exactly is a cost object, and how is it used in accounting and finance? In this blog post, we will explore the definition of cost objects, common types used in business and finance, and their role in cost accounting.

We will also answer frequently asked questions, including who assigns costs to cost objects and why we assign them. We will also discuss the challenges businesses may face when assigning costs and provide examples of cost objects used in the manufacturing industry.

Finally, we will explore techniques for allocating costs to cost objects and discuss how the size of a business can impact its use. By the end of this post, you will have a comprehensive understanding of cost objects and their importance in managing business finances.

What Is a Cost Object and How Is It Defined in Accounting and Finance? – Understanding Cost Objects

In accounting and finance, a cost object consumes resources or generates costs within a business or organization. It can be a product, service, project, department, customer, or any other entity that requires resources and generates costs.

A cost object can help identify the costs associated with producing a particular product or service, performing a specific activity, or serving a typical customer. This information can then be used to make more informed decisions about pricing, resource allocation, and process improvements .

For example, each bike would be a cost object in a manufacturing company that produces bicycles. The costs associated with producing each bicycle, such as materials, labor, and overhead expenses, would be tracked and assigned to that cost object.

This information can then be used to determine the true cost of each bicycle and make more informed decisions about pricing, production processes, and resource allocation.

In service-based businesses, cost objects can be more challenging to identify. For example, each project or client could be a cost object in a consulting firm. The costs associated with each project or client, such as labor and travel expenses, would be tracked and assigned to that cost object.

There are two types of cost objects: direct and indirect. Direct cost objects can be traced to a particular product, service, or activity. Indirect cost objects are not easily traced back to a particular product, service, or activity but consume resources and generate costs.

It is essential to accurately assign costs to cost objects to make more informed decisions about pricing, resource allocation, and process improvements. Failure to accurately assign costs to cost objects can lead to inaccurate pricing decisions, inefficient use of resources, and ultimately lower profits.

What Are Some Common Types of Cost Objects Used in Business and Finance? – Understanding Cost Objects

In business and finance, everyday cost objects are used to identify and track costs associated with producing goods or services, providing customer support, and managing operations. These cost objects help businesses understand the true costs of their activities and make informed decisions about pricing, resource allocation, and process improvements.

Output Cost – Types of Cost Objects Used in Business and Finance

One common type of cost object is the output cost. This refers to the cost of producing a good or providing a service that will be sold for a profit. It includes materials, labor, and overhead expenses directly associated with the production process. By accurately identifying and tracking output costs, businesses can determine the true cost of their products or services and make informed pricing decisions that maximize profits.

Operational Cost – Types of Cost Objects Used in Business and Finance

Another common type of cost object is operational cost. This includes departmental, functional, event, and customer-specific costs associated with managing and operating a business. 

For example, the operational cost of an event management company would include all expenses related to planning and executing events, such as venue rentals, catering, and marketing expenses. By tracking operational costs, businesses can identify areas where they can improve efficiency and reduce costs while maintaining a high service level.

Business Relationship Cost – Types of Cost Objects Used in Business and Finance

Business relationship costs are another type of cost object. These costs refer to the money spent promoting or maintaining relationships with customers, suppliers, and other business partners. 

For example, licensing fees, trade association dues, and customer freebies are all examples of business-related costs. These costs are significant because they help businesses establish and maintain strong relationships with their partners, which can lead to increased revenue and long-term success.

In addition to these types of cost objects, businesses may use many other objects to track costs and make informed decisions. 

For example, customer acquisition costs, which refer to acquiring new customers, can be useful for businesses looking to expand their customer base. Similarly, employee-related costs, such as salaries , benefits, and training expenses, can be tracked as a cost object to help businesses understand the true cost of their workforce.

What Is an Example of a Cost Object in Business? – Understanding Cost Objects

An example of a cost object in business could be a product line or a specific service. Let’s consider the scenario of a company that manufactures and sells three different types of smartphones – basic, mid-range, and premium. In this case, each product line is a cost object, and the company can track the costs associated with each line separately.

The company can identify and track the costs associated with each cost object to determine the cost of producing each smartphone model. For example, the cost of materials, labor, and overhead for producing each smartphone can be tracked separately for each product line .

This information can be used to make informed pricing decisions, as the company can determine the actual cost of each product and adjust the price accordingly to maximize profitability.

In addition to pricing decisions, cost objects can help identify areas where costs can be reduced or efficiency can be improved. For example, suppose the company identifies that the cost of producing the mid-range smartphone is higher than expected.

In that case, they can analyze the costs associated with that product line to identify areas where costs can be reduced. This may include identifying cheaper materials or streamlining the production process.

Another scenario where cost objects can be helpful is in customer profitability analysis. By tracking the costs associated with each customer, businesses can identify which customers are the most profitable and which are not. This information can be used to make informed decisions about customer acquisition and retention strategies.

Who Typically Assigns Costs to Cost Objects Within an Organization? – Understanding Cost Objects

In an organization, the process of assigning costs to cost objects is typically performed by various individuals or departments, depending on the size and complexity of the organization. The following list outlines some of the key stakeholders involved in the cost assignment process:

1. Management Accountants – Who Typically Assigns Costs to Cost Objects Within an Organization?

Management accountants are responsible for analyzing and reporting on the organization’s financial performance. They often play a key role in assigning costs to cost objects, as they deeply understand the organization’s financial systems and processes.

2. Production Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Production managers are responsible for overseeing the production process and ensuring that it runs smoothly and efficiently. They may assign costs to cost objects related to the production process, such as the cost of raw materials, labor, and equipment.

3. Sales and Marketing Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Sales and marketing managers promote the organization’s products or services and generate revenue. They may assign costs to cost objects related to sales and marketing activities, such as advertising and promotions.

4. Purchasing Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Purchasing managers are responsible for sourcing and procuring the materials and supplies needed for the organization’s operations. They may assign costs to cost objects related to the procurement process, such as raw materials and shipping costs.

5. IT Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

IT managers are responsible for overseeing the organization’s technology systems and infrastructure. They may assign costs to cost objects related to IT expenses, such as software licenses and hardware maintenance.

6. Human Resources Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Human resources managers are responsible for managing the organization’s workforce. They may assign costs to cost objects related to employee compensation, benefits, and training.

7. Financial Controllers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Financial controllers are responsible for managing the organization’s financial systems and processes. They may assign costs to cost objects related to overhead expenses, such as rent, utilities, and insurance.

8. Operations Managers – Who Typically Assigns Costs to Cost Objects Within an Organization?

Operations managers are responsible for overseeing the day-to-day operations of the organization. They may assign costs to cost objects related to operational expenses, such as supplies and equipment maintenance.

In addition to these stakeholders, other individuals or departments may be involved in the cost assignment process, depending on the specific needs and requirements of the organization. For example, a large manufacturing company may have a dedicated cost accounting team responsible for assigning costs to cost objects and analyzing the organization’s financial performance.

How Are Cost Objects Used in Cost Accounting to Help Businesses Manage Their Costs? – Understanding Cost Objects

Cost accounting is a branch of accounting that focuses on measuring, analyzing, and reporting the costs associated with producing goods or providing services. 

One of the key concepts in cost accounting is the use of cost objects, which are specific items, products, or activities to which costs can be attributed. 

Cost objects are used to help businesses manage their costs in several ways, as outlined below:

1. Cost Control – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses control costs by identifying the specific items or activities driving their expenses. By assigning costs to specific cost objects, businesses can track their expenses more accurately and identify areas where they may be overspending. 

For example, a manufacturing company may use cost objects to track the costs of producing each product in its line. This can help them identify the most profitable products needing reevaluation or discontinued.

2. Cost Analysis – How Are Cost Objects Used in Cost Accounting

Cost objects also help businesses analyze costs and make informed decisions about managing them. By analyzing the costs associated with specific cost objects, companies can identify trends, patterns, and areas for improvement. 

For example, a service-based company may use cost objects to track the costs associated with each client or project. This can help them identify which clients or projects are the most profitable and which may cost them money.

3. Cost Planning – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses plan for their costs and make informed pricing, budgeting, and resource allocation decisions. 

By understanding the costs associated with specific cost objects, businesses can make more accurate projections about their future expenses and revenues. For example, a construction company may use cost objects to track the costs associated with each phase of a building project. This can help them create more accurate project estimates and avoid cost overruns.

4. Cost Reduction – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses reduce their costs by identifying areas where they may be able to streamline their operations or reduce waste. 

By analyzing the costs associated with specific cost objects, businesses can identify opportunities for cost reduction and implement strategies to improve their efficiency. For example, a retail store may use cost objects to track the costs associated with each product line. This can help them identify the most profitable products that may tie up valuable resources.

5. Cost Allocation – How Are Cost Objects Used in Cost Accounting

Cost objects help businesses allocate their costs to the appropriate departments, products, or services. By assigning costs to specific cost objects, businesses can ensure that their expenses are accurately allocated and reported. 

This can help them make more informed decisions about resource allocation and pricing. For example, a hospital may use cost objects to track the costs associated with each patient. This can help them allocate costs to the appropriate departments and ensure their expenses are accurately reported to insurance providers and regulatory agencies.

When Would It Be Appropriate to Use a Project as a Cost Object? – Understanding Cost Objects

Using a project as a cost object can be appropriate in several situations, as outlined below:

1. Project Cost Control – When Would It Be Appropriate to Use a Project as a Cost Object?

By using a project as a cost object, businesses can control their costs more effectively by tracking the expenses associated with a specific project. 

This can help them identify areas where they may be overspending and take corrective action before it is too late. For example, a construction company may use a project as a cost object to track the costs associated with building a new office building. This can help them monitor their expenses and ensure they stay within budget.

2. Project Cost Analysis – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can also help businesses analyze their costs and make informed decisions about future projects. 

By analyzing the costs associated with a specific project, businesses can identify areas to reduce costs or improve their efficiency. For example, a software development company may use a project as a cost object to track the costs of developing a new app. This can help them identify areas where they may be able to streamline their development process and reduce costs.

3. Project Cost Planning – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can help businesses plan for their costs more effectively by providing a detailed breakdown of the expenses associated with a specific project. 

This can help businesses make more accurate projections about their expenses and revenues. For example, a marketing agency may use a project as a cost object to track the costs associated with developing a new advertising campaign. This can help them create more accurate project estimates and avoid cost overruns.

4. Project Cost Reduction – When Would It Be Appropriate to Use a Project as a Cost Object?

By using a project as a cost object, businesses can identify areas where they may be able to reduce costs and improve their efficiency. This can help them achieve their goals more effectively and with fewer resources. 

For example, a manufacturing company may use a project as a cost object to track the costs associated with developing a new product line. This can help them identify areas where they may be able to reduce costs and improve their manufacturing processes.

5. Project Cost Allocation – When Would It Be Appropriate to Use a Project as a Cost Object?

Using a project as a cost object can help businesses allocate their costs more accurately to the appropriate departments or products. By tracking the expenses associated with a specific project, businesses can ensure that their costs are allocated correctly and reported accurately. 

For example, a consulting firm may use a project as a cost object to tracking the costs associated with a specific client engagement. This can help them allocate costs to the appropriate departments and ensure that their expenses are accurately reported.

Who Benefits the Most From Using Cost Objects to Track Expenses in a Business?

Below are some of the stakeholders that can benefit the most from using cost objects to track expenses in a business:

1. Management – Who Benefits the Most From Using Cost Objects?

One of the primary beneficiaries of using cost objects to track expenses is management. By better understanding where money is spent within a company, management can make more informed decisions about where to allocate resources, which projects to pursue, and which expenses to cut. Cost objects can also help management identify areas where efficiency and costs can be improved.

2. Accountants – Who Benefits the Most From Using Cost Objects?

Accountants also benefit from using cost objects to track expenses in a business. Cost objects provide a more accurate picture of where money is being spent, which helps accountants create more accurate financial statements. This can help them comply with financial reporting requirements, such as GAAP or IFRS, and provide stakeholders with a clear view of the company’s financial health.

3. Sales and Marketing – Who Benefits the Most From Using Cost Objects?

Sales and marketing teams can benefit from using cost objects to track expenses by understanding the cost of acquiring new customers or generating new leads. Using cost objects, they can see how much money is spent on specific campaigns or initiatives and make informed decisions about where to invest their resources.

4. Operations – Who Benefits the Most From Using Cost Objects?

Operations teams can benefit from using cost objects to track expenses by identifying areas where efficiency can be improved. By understanding the cost of specific processes or activities, operations teams can find ways to streamline operations and reduce costs.

5. Investors – Who Benefits the Most From Using Cost Objects?

Investors can benefit from using cost objects to track expenses in a business by having a better understanding of how the company is using its resources. This can help them make informed decisions about whether or not to invest in a company and can provide insight into the company’s long-term financial health.

6. Customers – Who Benefits the Most From Using Cost Objects?

While not traditional stakeholders, customers can indirectly benefit from using cost objects to track expenses in a business. By better understanding where money is being spent, companies can potentially reduce their costs and offer products or services at a lower price point. This can ultimately benefit customers by providing them with more affordable options.

What Are Some Challenges Businesses May Face When Assigning Costs to Cost Objects? – Understanding Cost Objects

Assigning costs to cost objects can be challenging for businesses, mainly when numerous cost objects are involved or when the costs are not easily attributable to a specific object. Below are some of the common challenges businesses may face when assigning costs to cost objects:

1. Identifying Cost Objects – Challenges Businesses May Face

One of the biggest challenges businesses face when assigning costs to cost objects is identifying the appropriate cost objects. It can be challenging to determine which costs should be assigned to which cost objects, mainly if many cost objects are involved or if the costs are not easily attributable to a specific object.

2. Allocating Indirect Costs – Challenges Businesses May Face

Another challenge businesses face when assigning costs to cost objects is allocating indirect costs. Indirect costs, such as overhead or administrative expenses, can be difficult to allocate to specific cost objects. Businesses may need to use allocation methods, such as activity-based costing, to allocate indirect costs to cost objects.

3. Choosing the Right Allocation Method – Challenges Businesses May Face

Businesses may face challenges in choosing the right allocation method when assigning costs to cost objects. Several different allocation methods are available, each with advantages and disadvantages. Choosing the correct method can be challenging and may require careful consideration of the specific circumstances and goals of the business.

4. Ensuring Accuracy – Challenges Businesses May Face

Assigning costs to cost objects requires accuracy to ensure the resulting data is reliable and valuable. However, achieving accuracy can be difficult, mainly if the data is incomplete or inaccurate. Businesses may need to implement procedures to ensure data accuracy in cost allocation.

5. Updating Cost Object Data – Challenges Businesses May Face

Cost objects may change over time, challenging businesses when assigning costs. For example, if a product line is discontinued, the costs associated with that product line may need to be allocated to a different cost object. Businesses must ensure that they regularly update cost object data to reflect changes in the industry.

6. Ensuring Consistency – Challenges Businesses May Face

Consistency in cost allocation is important to ensure the resulting data is comparable over time. However, achieving consistency can be challenging, mainly if the business uses different allocation methods or cost objects over time. Companies may need to implement procedures to ensure that cost allocation is consistent over time.

7. Dealing with Complexity – Challenges Businesses May Face

Some businesses may have complex operations, making assigning costs to cost objects challenging. For example, assigning costs to cost objects can become complex if a business operates in multiple locations or has multiple product lines. Businesses may need sophisticated cost allocation methods or software to handle this complexity.

When Should a Business Consider Creating a New Cost Object? – Understanding Cost Objects

There may be situations where a business needs to create a new cost object to manage costs better. 

Below are some scenarios where a business should consider creating a new cost object:

1. Introducing a New Product or Service – When Should a Business Consider Creating a New Cost Object?

When a business introduces a new product or service, creating a new cost object may be appropriate to track the costs associated with that product or service. This can help the business to determine the profitability of the new offering and to identify opportunities to reduce costs.

2. Expanding into a New Market or Region – When Should a Business Consider Creating a New Cost Object?

If a business expands into a new market or region, it may need to create a new cost object to track the costs associated with that market or region. This can help the business determine whether the expansion is profitable and identify opportunities to reduce costs in the new market or region.

3. Undertaking a Large Project – When Should a Business Consider Creating a New Cost Object?

When a business undertakes a large project, such as building a new factory or launching a new marketing campaign, it may be appropriate to create a new cost object to track the costs associated with the project. This can help the business determine the project’s total cost and identify opportunities to reduce costs.

4. Tracking Costs for a Specific Customer – When Should a Business Consider Creating a New Cost Object?

Sometimes, a business may want to track costs associated with a specific customer, particularly if that customer represents a significant portion of the business’s revenue. Creating a new cost object for the customer can help the business determine the customer’s profitability and identify opportunities to reduce costs associated with serving that customer.

5. Managing Costs for a Specific Department – When Should a Business Consider Creating a New Cost Object?

Suppose a business wants to track costs associated with a specific department, such as human resources or IT. In that case, creating a new cost object for that department may be appropriate. This can help the business determine the department’s total cost and identify opportunities to reduce costs.

6. Reorganizing the Business – When Should a Business Consider Creating a New Cost Object?

Suppose a business undergoes a significant reorganization, such as merging with another company or restructuring its operations. In that case, it may be appropriate to create new cost objects to reflect the new organizational structure. This can help the business to track costs associated with the new structure and to identify opportunities to reduce costs.

What Are Some Examples of Cost Objects Used in the Manufacturing Industry? – Understanding Cost Objects

In the manufacturing industry, cost objects are crucial in determining the cost of producing goods. Cost objects track and allocate costs to specific products, departments, or activities. This helps manufacturers understand the true cost of production and make informed decisions to improve profitability. Some common examples of cost objects used in the manufacturing industry include:

1. Products – Examples of Cost Objects Used in the Manufacturing Industry

Producing a specific product is an everyday cost object in manufacturing. By tracking the cost of materials, labor, and overhead associated with producing a product, manufacturers can determine the profitability of each product and make informed decisions about pricing, production volumes, and product mix.

2. Production Processes – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can also be used to track the cost of specific production processes, such as assembly, machining, or testing. By understanding the cost of each process, manufacturers can identify inefficiencies, reduce waste, and optimize production to improve profitability.

3. Departments – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of individual departments within a manufacturing facility, such as production, engineering, or quality control. By understanding the cost of each department, manufacturers can identify opportunities to reduce costs and improve efficiency.

4. Suppliers – Examples of Cost Objects Used in the Manufacturing Industry

Manufacturers can also use cost objects to track the cost of materials and services specific suppliers provide. By understanding the cost of each supplier, manufacturers can negotiate better pricing, improve supplier relationships, and reduce supply chain risks.

5. Equipment – Examples of Cost Objects Used in the Manufacturing Industry

Operating and maintaining specific equipment costs can be tracked using cost objects. By understanding the cost of each piece of equipment, manufacturers can identify opportunities to improve equipment efficiency, reduce downtime, and optimize maintenance schedules.

6. Customers – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of serving specific customers. By understanding the cost of each customer, manufacturers can identify which customers are profitable and which are not and make informed decisions about pricing, sales, and marketing.

7. Projects – Examples of Cost Objects Used in the Manufacturing Industry

Cost objects can be used to track the cost of specific projects, such as new product development, process improvement, or facility upgrades. By understanding the cost of each project, manufacturers can make informed decisions about project prioritization, resource allocation, and project management.

What Are Some Techniques Used to Allocate Costs to Cost Objects? – Understanding Cost Objects

There are several techniques used to allocate costs to cost objects, including:

1. Direct Allocation – Techniques Used to Allocate Costs to Cost Objects

Direct allocation is the simplest method, assigning costs directly to a specific cost object. For example, the cost of raw materials used in a product can be assigned directly to that product.

2. Activity-Based Costing (ABC) – Techniques Used to Allocate Costs to Cost Objects

ABC is a more sophisticated method of cost allocation that assigns costs to cost objects based on the activities that drive those costs. 

ABC involves identifying all the activities involved in producing a product or service and assigning the costs associated with each activity to the cost object. This method is proper when products or services require different activity levels and when traditional allocation methods may not accurately reflect the cost drivers.

3. Job Order Costing – Techniques Used to Allocate Costs to Cost Objects

Job order costing is a cost allocation method used in manufacturing companies that produce custom or unique products. With job order costing, costs are assigned to a specific job or order rather than a product or service. For example, a custom furniture manufacturer might use job order costing to track the costs of producing a specific piece of furniture.

4. Process Costing – Techniques Used to Allocate Costs to Cost Objects

Process costing is a cost allocation method used in manufacturing companies that produce large quantities of identical products. It assigns costs to a specific production process rather than a product or service. For example, a cereal manufacturer might use process costing to track the costs associated with producing a certain type of cereal.

5. Standard Costing – Techniques Used to Allocate Costs to Cost Objects

Standard costing is a method of allocation that assigns costs to cost objects based on predetermined standards or estimates. This method is often used in manufacturing companies that produce large quantities of identical products. Standard costing assigns costs based on the estimated cost of producing a single product unit .

6. Variable Costing – Techniques Used to Allocate Costs to Cost Objects

Variable costing is a method of allocation that assigns only variable costs to a specific cost object, such as direct materials, direct labor, and variable overhead. 

Fixed costs are not assigned to a specific cost object but are treated as period expenses. This method is proper when analyzing the profitability of particular products or services, as it provides a more accurate picture of the variable costs associated with production.

How Does the Size of a Business Impact the Use of Cost Objects? – Understanding Cost Objects

The size of a business can impact the use of cost objects in several ways.

Firstly, smaller businesses may have fewer cost objects than larger firms, as they may have a simpler organizational structure and product/service offerings. This can make it easier for them to assign and track costs, as there are fewer cost objects to manage.

On the other hand, larger businesses may have a more complex organizational structure, with multiple departments and product/service offerings. This can result in more cost objects, making assigning and tracking costs more challenging. However, larger businesses may also have more resources and specialized personnel to manage and allocate costs to cost objects.

Secondly, the size of a business can impact the level of detail in cost tracking. Smaller companies may not require as detailed cost tracking as larger businesses, as they may have fewer transactions and expenses to manage. For example, a small retail business may only need to track costs at a high level for each product category, while a large retail chain may need to track costs for each product SKU.

Thirdly, the size of a business can impact the choice of cost allocation methods. Smaller companies may have more flexibility in choosing a cost allocation method, as they may have a more straightforward cost structure . Larger businesses, on the other hand, may need to use more complex cost allocation methods to assign costs to each cost object accurately.

How Can Businesses Stay Up-to-Date With Best Practices for Using Cost Objects in Accounting and Finance? – Understanding Cost Objects

To stay up-to-date with best practices for using cost objects in accounting and finance, businesses can take several steps:

1. Attend Industry Conferences And Seminars – Staying Up-to-Date With Best Practices

Attending conferences and seminars related to accounting and finance can provide businesses with the latest updates and best practices in cost object management. These events are also an excellent opportunity to network with other professionals in the field.

2. Read Industry Publications – Staying Up-to-Date With Best Practices

Keeping up-to-date with industry publications, such as accounting and finance journals, can provide businesses with valuable insights and best practices for using cost objects. Subscribing to newsletters and following industry influencers on social media can also provide helpful information.

3. Engage With Professional Associations – Staying Up-to-Date With Best Practices

Professional associations, such as the American Institute of Certified Public Accountants (AICPA), offer accounting and finance professionals training and resources. Engaging with these organizations can provide businesses access to the latest updates and best practices in cost object management.

4. Utilize Technology – Staying Up-to-Date With Best Practices

Advances in technology have made it easier for businesses to manage their costs and allocate them to cost objects. Cost accounting software can give businesses real-time data and analytics to make informed business decisions.

5. Work With A Professional Accountant – Staying Up-to-Date With Best Practices

Working with a professional accountant can guide businesses on best practices for using cost objects. An experienced accountant can also help businesses identify areas for improvement and implement effective cost-management strategies.

Conclusion – Understanding Cost Objects

In conclusion, understanding cost objects is a crucial aspect of cost accounting and finance for any business. It allows for effective cost management and decision-making, enabling companies to accurately track expenses and allocate costs to the appropriate sources.

By identifying and assigning costs to cost objects, businesses can gain insights into their operations, identify areas for improvement, and optimize their financial performance. However, it is essential to consider the challenges that may arise when assigning costs to cost objects and to review and update the allocation methods used regularly.

With the right techniques and best practices, businesses of all sizes can benefit from using cost objects in their accounting and finance practices. By staying up-to-date with the latest trends and practices in cost accounting, companies can ensure that they make informed decisions and maximize their profitability.

Recommended Readings – Conclusion

• Understanding Absorption Costing and Improving Absorption Rate
• Cost of Goods Sold COGS- Defined & Explained (With Examples)
• Opportunity Cost- Defined & Explained (With Examples)

Frequently Asked Questions – Understanding Cost Objects

1. what is the main purpose of the cost object – faqs.

The primary purpose of a cost object is to enable a business to identify and track the costs associated with a specific item, product, service, or activity.

By assigning costs to cost objects, businesses can analyze and manage their expenses more effectively, make informed decisions, and improve profitability. Cost objects provide businesses with a way to allocate costs accurately and fairly and help them understand the financial impact of each cost element on their overall operations.

For example, a manufacturing company might assign costs to each unit of a particular product to determine its profitability, or a service-based business might give costs to specific clients to better understand the profitability of each customer relationship. 

2. Why Do We Assign Cost to Cost Objects? – FAQs

We assign costs to cost objects for several reasons. The primary reason is to track the costs associated with producing a product, providing a service, or engaging in an activity. By assigning costs to specific cost objects, we can accurately measure the expenses that go into producing each unit or providing each service. This allows us to calculate profitability, set prices, and make informed decisions about our business operations.

Another reason we assign costs to cost objects is to allocate expenses fairly and accurately across different departments, products, or services. This helps us understand which areas of our business are the most profitable and where we need to make adjustments to improve performance. By allocating costs to cost objects, we can ensure that each business area is responsible for its expenses and that costs are shared fairly across the organization.

Finally, assigning costs to cost objects allows us to comply with accounting and financial reporting standards. For example, businesses must report their expenses in financial statements, and assigning costs to cost objects helps ensure that these reports accurately reflect the expenses associated with each product or service. This is important for regulatory compliance and providing investors and other stakeholders with accurate financial information.

Updated:5/18/202

Meet The Author

Danica De Vera

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What is Cost Allocation? Definition & Process

Jul 16, 2020 Michael Whitmire

Working with the former accountants now working at FloQast, we decided to take a look at some of the pillars of the accounting professions.

The key to running a profitable enterprise of any kind is making sure that your prices are high enough to cover all your costs — and leave at least a bit for profit. For a really simple business — like the proverbial lemonade stand that almost every kid ran — that’s pretty simple. Your costs are what you (or your parents) paid for lemons and sugar. But what if it’s a more complex business? Then you might need to brush up on cost accounting, and learn about allocation accounting . Let’s walk through this using the hypothetical company, Lisa’s Luscious Lemonade. 

What is cost allocation ?

The cost allocation definition is best described as the process of assigning costs to the things that benefit from those costs or to cost centers . For Lisa’s Luscious Lemonade, a cost center can be as granular as each jug of lemonade that’s produced, or as broad as the manufacturing plant in Houston. 

Let’s assume that the owner, Lisa, needs to know the cost of a jug of lemonade. The total cost to create that jug of lemonade isn’t just the costs of the water, lemons, sugar and the jug itself, but also includes all the allocated costs to make it. 

Let’s start by defining some terms…

Direct costs are costs that can be traced directly to the product or service itself. For manufacturers, these consist of direct materials and direct labor. They appear in the financial statements as part of the cost of goods sold .

Direct materials are those that become an integral part of the finished product. This will be the costs of the water, sugar, lemons, the plastic jug, and the label. 

Direct labor includes the labor costs that can be easily traced to the production of those finished products. Direct labor for that jug will be the payroll for the workers on the production line. 

Indirect costs are the costs that can’t be easily traced to a product or service but are clearly required for making whatever an enterprise sells. This includes materials that are used in such insignificant quantities that it’s not worth tracing them to finished products, and labor for employees who work in the factory, but not on the production line. 

Overhead costs encompass all the costs that support the enterprise that can’t be directly linked to making the items that are sold. This includes indirect costs , as well as selling, marketing, administration, and facility costs. 

Manufacturing overhead includes the overhead costs that are directly related to making the products for sale. This includes the electricity, rent, and utilities for the factory and salaries of supervisors on the factory floor. 

Product costs are all the costs in making or acquiring the product for sale. These are also known as manufacturing costs or total costs . This includes direct labor, direct materials, and allocated manufacturing overhead. 

What is the process?

The first step in any cost allocation system is to identify the cost objects to which costs need to be allocated. Here, our cost objec t is a jug of lemonade. For a more complex organization, the cost object could be a product line, a department, or a branch. 

Direct costs are the simplest to allocate. Last month, Lisa’s Luscious Lemonades produced 50,000 gallons of lemonade and had the following direct costs:

                                    Total costs     Cost per gallon Direct materials        $142,500               $2.85 Direct labor                   $37,500                   $.75

How are costs allocated?

Allocating overhead costs is a bit more complex. First, the overhead costs are split between manufacturing costs and non-manufacturing costs. Some of this is pretty straightforward: the factory floor supervisor’s salary is clearly a manufacturing cost, and the sales manager’s salary is a non-manufacturing cost. But what about the cost of human resources or other service departments that serve all parts of the organization? Or facilities costs, which might include the rent for the building, insurance, utilities, janitorial services, and general building maintenance?

Human resources and other services costs might be logically split based on the headcount of the manufacturing versus non-manufacturing parts of the business. Facilities costs might be split based on the square footage of the manufacturing space versus the administrative offices. Electricity usage might be allocated on the basis of square footage or machine hours , depending on the situation. 

Let’s say that for Lisa’s Luscious Lemonades, after we split the overhead between manufacturing and non-manufacturing costs, we have the following annual manufacturing overhead costs : 

Supervisor salary                                  $84,000 Indirect costs                                         $95,000 Facility costs                                           $150,000 Human resources                                  $54,000 Depreciation                                          $65,000 Electricity                                                $74,000 Total manufacturing overhead             $522,000

In a perfect world, it would be possible to keep an accurate running total of all overhead costs so that management would have detailed and accurate cost information. However, in practice, a predetermined overhead rate is used to allocate overhead using an allocation base . 

This overhead rate is determined by dividing the total estimated manufacturing overhead by the estimated total units in the allocation base . At the end of the year or quarter, the allocated costs are reconciled to actual costs. 

Ideally, the allocation base should be a cost driver that causes those overhead costs . For manufacturers, direct labor hours or machine-hours are commonly used. Since Lisa only makes one product — gallon jugs of lemonade — the simplest cost driver is the number of jugs produced in a year. 

If we estimate that 600,000 gallons of lemonade are produced in a year, then the overhead rate will be $522,000 / 600,000 = $.87 per gallon.

Our final cost to produce a gallon of Lisa’s Luscious Lemonade is as follows:

Direct materials                             $2.85 Direct labor                                     $0.75 Manufacturing overhead               $0.87 Total cost                                         $4.47

What is cost allocation used for?

Cost allocation is used for both external reporting and internally for decision making. Under generally accepted accounting principles (GAAP), the matching principle requires that expenses be reported in the financial statements in the same period that the related revenue is earned. 

This means that manufacturing overhead costs cannot be expensed in the period incurred, but must be allocated to inventory items, where those costs remain until the inventory is sold, when overhead is finally expensed as part of the cost of goods sold. For Lisa’s Luscious Lemonade, that means that every time a jug of lemonade is produced, another $4.47 goes into inventory. When a jug is sold, $4.47 goes to the cost of goods sold. 

However, for internal decision-making, the cost allocation systems used for GAAP financials aren’t always helpful. Cost accountants often use activity-based costing , or ABC, in parallel with the cost allocation system used for external financial reporting . 

In ABC, products are assigned all of the overhead costs that they can reasonably be assumed to have caused. This may include some — but not all — of the manufacturing overhead costs , as well as operating expenses that aren’t typically assigned to products under the costing systems used for GAAP. 

AutoRec to keep you sane

Whatever cost accounting method you use, it’s going to require spreadsheets that you have to reconcile to the GL. Combine that with the other reconciliations you have to do to close out the books, and like Lisa’s controller, you might be ready to jump into a vat of lemonade to drown your sorrows. 

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Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.

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Cost objects and cost assignment in accounting

In this article, we will define cost objects and discuss how the choice of a cost object affects the cost assignment process and hence outcome.

• 1. Cost object definition

A cost object is anything we want to determine the cost of.

Examples of cost objects are: a product, a product line, a brand category, a service, a project, an activity or task, a process, a department, a business segment, a channel, a customer, a supplier, a geographic area, etc.

For reporting purposes, organizations usually have to determine the cost of their products or services. But, internally the organizations can create additional reports where they try to measure costs of various cost objects (e.g., departments, product lines, segments, suppliers) in order to get more insights into operations, performance, risks, and opportunities.

• 2. Cost object choice and cost assignment

The choice of the cost object impacts whether a specific cost can be directly traced to it or not. For example, raw materials that are part of a product usually can be traced to specific products via materials requisition forms. But, it might be more challenging to trace the same information (about raw materials used) to product lines when different products use the same raw materials. The ability to trace specific costs to cost objects in an economically feasible (i.e., cost effective) way determines whether a specific cost is a “direct cost” or “indirect cost”.

Direct costs of a cost object can be traced to that cost object in an economically feasible (cost-effective) way.

Indirect costs of a cost object cannot be traced to that cost object in an economically feasible (cost-effective) way. As the result, indirect costs are allocated to cost objects using some kind of allocation rule.

The ability to (directly) trace costs to cost objects usually depends on:

• The design of operations
• The availability of technology for information gathering and processing
• The materiality of the cost

Complex operations make it more challenging to trace costs to cost objects. The lack of information gathering and processing technology or poorly organized information systems (e.g., accounting, operations) also make it more difficult to trace costs to cost objects. Finally, immaterial costs (e.g., relatively small costs) are often not directly traced to cost objects because the benefit from tracing immaterial costs is lower than the cost associated with tracing that information. We have to remember that in a reporting process the benefits from reporting should outweigh the costs associated with preparing those reports.

Ideally, we want to be able to directly trace costs to the cost objects. But in practice, often available data does not allow cost tracing, and the result, organizations need to allocate costs to cost objects. The issue with cost allocation is that it is less accurate and can be subjective depending on the allocation process and rules.

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Table of contents, cost: definition.

Cost is the sacrifice made that is usually measured by the resources given up to achieve a particular purpose. It is a sacrifice made in order to obtain some goods or services.

• Costs are not always expenses
• Some costs are assets, others are expenses
• Expenses are expired (used up) costs

Eventually, costs will become expenses.

Cost: Explanation

Cost measurement and allocation are significant aspects of financial and management accounting . Cost measurement and allocation techniques are used not only to assign incurred costs to products or services but also to plan future activities.

In accounting , the term cost has a variety of meanings. Furthermore, various cost concepts and measurement techniques are needed for internal planning and control.

The purpose of this article is to analyze the cost classifications and behavior patterns that are widely used in management accounting . Such an analysis will help management accountants when supplying information for planning and decision-making purposes.

Types of Cost

Cost can be defined as the amount (measured in terms of money) paid for goods and services received (or to be received).

Accountants and managers use many different concepts of cost, each usually for a different purpose. It is the classification of cost that indicates to managers how the term is being used and whether they can do anything about the cost or not.

Important types of costs are explained below.

Product Cost

Product costs are assigned to goods either purchased or manufactured for resale; they are incurred to produce or purchase a product. Product costs are initially identified as part of the inventory on hand.

Inventoriable Cost

Inventoriable cost is another name for product cost. It is stored as the cost of inventory until the goods are sold. Inventoriable costs become expenses ( cost of goods sold ) when the product is sold.

Period Cost

Period costs are expensed during the time period in which they are incurred. They are costs that are treated as expenses of the period in which the costs are incurred.

An expense refers to the consumption of assets for the purpose of generating revenue .

Direct Cost

A direct cost is a cost that can be traced to specific segments of operations.

Indirect Cost

An indirect cost is a cost that cannot be identified with specific segments of operations. Common costs are shared by multiple segments.

Example Segments = Plastic chairs (P) & Wood chairs (W)

Manufacturing Cost

Product costs consist of:

• Direct material (DM)
• Direct labor (DL)
• Manufacturing overhead (MOH, OH)

The formula for manufacturing cost is the following:

Manufacturing costs = DM + DL + MOH

Direct material (DM): Raw materials that are physically incorporated into the finished product.

Direct labor cost: The cost of salaries, wages, and fringe benefits for personnel who work directly on the manufactured products.

Manufacturing overhead: Manufacturing costs other than direct material and direct labor costs.

• Indirect material These are required for the production process but do not become an integral part of the finished product.
• Indirect labor Indirect labor refers to the cost of personnel who do not work directly on the product, but whose services are necessary for the manufacturing process.

Conversion Cost

Conversion costs are direct labor costs plus manufacturing overhead costs.

These are the costs of direct material and direct labor.

Non-manufacturing Cost

Period costs (expenses) incurred in and due to administrative activities.

Variable Cost

A variable cost changes in direct proportion to a change in the level of activity.

Fixed costs do not change in total as activity changes.

Marginal Cost

Marginal costs are additional costs incurred in producing extra units.

Incremental Cost

These types of costs are the difference between costs for the corresponding items under each alternative being considered.

For example, incremental cost increasing output from $1 000 to $1 100 units per week is the additional cost of producing an extra 100 units per week.

Difference Between Marginal and Incremental Cost

The main difference is that marginal cost represents the additional cost of one extra unit of output, whereas incremental cost represents the additional cost resulting from a group of additional units of output.

These costs are created decisions made in the past that cannot be changed by any decision that will be made in the future. Written down values of any asset previously purchased are an example of sunk costs.

Opportunity Cost

This cost refers to the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action be given up. Notably, opportunity cost only applies to resources that have some alternative uses.

If no alternative use of resources exists, then the opportunity cost is zero.

Cost of Goods Sold

This is the expense measured by the cost of the finished goods sold during a specific period.

Work in Process

Partially completed products that are not yet ready for sale.

Finished Goods

Completed goods available for sale .

Elements of Cost

The elements of cost are categorized under:

• Factory overhead

1. Materials

These are the principal substances used in production.

Materials are transformed into finished goods through the addition of labor and factory overhead. The cost of materials may be divided into direct and indirect materials as follows:

( a) Direct Materials

Direct materials are those that can be identified in the product, which can be conveniently measured and directly charged to the product.

Direct materials can be identified with the product, easily traced, and represent a major material cost associated with producing the product. Examples of direct materials include wood in furniture, iron in fans, clay in bricks, leather in shoes, and wheat in flour.

(b) Indirect Materials

All materials involved in the production of a product that are not direct materials are indirect materials.

For example, nails and glue used in the manufacturing of a table are examples of indirect materials. In other words, indirect materials cannot be directly identified.

Labor is the physical or mental effort expended in the production of a product. Labor costs may be divided into direct and indirect labor as follows:

(a) Direct Labor

Direct labor is all labor directly involved in producing a finished product; that represents a major labor cost of producing the product. The work of machine operators in a manufacturing concern would be considered direct labor.

(b) Indirect Labor All labor involved in producing a product that is not considered direct labor is classed as indirect labor. For example, the work of a plant supervisor in a manufacturing concern would be considered indirect labor.

3. Factory Overhead

Factory overhead refers to all costs other than direct materials and the direct labor required to produce a product. This follows from the fact that the cost of any product equals the cost of direct materials, direct labor, and factory overhead.

Indirect materials and indirect labor are also included in factory overhead. This is because they can not be identified with a specific product.

Other examples of factory overhead costs, aside from indirect materials and indirect labor, include rent, utility bills, and depreciation of factory equipment.

Factory overhead costs can be further classified as fixed, variable, and semi-variable costs . By grouping the above elements of cost, the following equations showing the relationships between costs are obtained:

• Prime cost = Direct material + Direct labor
• Conversion cost = Direct labor + Factory overhead
• Factory cost = Direct materials + Direct labor + Factory overhead

What is a cost?

What are the types of cost.

Cost can be defined as the amount paid for goods and services received. Important types of costs includes:- product cost- inventoriable cost - period cost - expense cost - direct cost - indirect cost - manufacturing cost - conversion cost - prime cost - non-manufacturing cost- variable cost - fixed cost - marginal cost - incremental cost - sunk cost - opportunity cost - work in process - finished goods

What is the difference between a marginal and a incremental cost?

What are the elements of a cost.

The elements of cost are categorized under:- material (the principal substances used in production)- labor (the physical or mental effort expended in the production of a product)- factory overhead (refers to all costs other than direct materials and the direct labor required to produce a product)

What are the equations under the elements of a cost that shows the relationships between costs obtained?

By grouping the above elements of cost, the following equations showing the relationships between costs are obtained: 1. Prime cost = direct material + direct labor 2. Conversion cost = direct labor + factory overhead 3. Factory cost = direct materials + direct labor + factory overhead

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Understanding Global Assignment Costs

By LaQuita Morrison, GMS

Confidence in the U.S. economy is rising, and with it, the number of companies seeking to establish, strengthen or expand their global positions is increasing. Often, this involves expatriating talent to fill key positions in other countries. Some companies will also provide global assignment opportunities to expand their employees’ knowledge and skills.

Whether your company is well versed or new to managing global assignments, the cost of them can be daunting. However, when appropriately managed, global assignments can positively impact a company’s global business goals.

Sending an employee and a family of three on a three-year global assignment could cost in excess of USD $1 million. So, it’s not surprising that many global companies believe traditional overseas assignments are cost-prohibitive. Some companies have reduced, frozen or even eliminated their global assignment programs. However, to remain competitive, companies still need to place the best talent at the appropriate locations, and often that talent isn’t available without a global transfer. This is when the proper management and oversight of relocation costs becomes imperative.

Understanding the Costs

If you’re planning global assignments, there are ways to scale back costs without compromising operations or impacting employee productivity. Finding that balance between employee support and cost management to successfully oversee global assignments is a challenge, but it can be done. Below is a list of some of the expenses associated with a global assignment:

• Candidate Assessment – Conducted by the company to determine if the employee is the right candidate for the global assignment.
• Pre-Decision Assessment – Aligns the individual needs of the employee and the employee’s family with the business goals of the assignment.
• Immigration – Obtaining the appropriate documentation for the assignment. The reason for the assignment will dictate the appropriate visa type.
• Tax Implications – Determining the tax implications of the assignment and responsibilities of both the company and the employee.
• Tax Assistance – Providing the employee with tax assistance, which could include consultation; preparation (for both home and host countries); filing (for both home and host countries); tax equalization.
• Host Country Housing – Providing reasonable and customary rent and utility costs for the employee’s housing in the host country according to regional guidelines based on family size and location.
• Cost-of-Living Allowance (COLA) – An allowance or differential paid to the employee for similar goods and services in the host location that they have in the home location based on family size and salary. Intended to cover costs to purchase host country goods and services over those from the home country.
• Transportation – An allowance for a car for the duration of the assignment, the amount of which may vary by location and family size.
• Hardship – An allowance paid in addition to salary and COLA for assignments in locations designated as a hardship for the employee based on factors that include potential violence, incidence of disease, medical care quality, geographic isolation and availability of goods and services.
• Miscellaneous Expense Allowance – One-time payment made, separate from base salary, intended to cover expenses not expressly covered in the Letter of Understanding, like renter’s insurance, obtaining a new driver’s license, immunizations, taxis, etc.
• Cultural/Language Training – Provided to the employee and the family to assist in understanding the host country culture and language.
• Home Finding and Destination Services – Locating housing in the host country, as well as registering with local authorities and setting up accounts.
• Departure Services – Home sale, property management, lease termination, etc.
• Global Household Goods – Transporting (via land, air and/or sea) or storing household goods and personal effects.
• Temporary Living – Fully furnished housing at the destination location.
• Repatriation – Return of the employee to the home country following assignment completion.

To learn more about managing global assignment costs, download our free guide.

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What Is Activity-Based Costing (ABC)?

How activity-based costing (abc) works, requirements for activity-based costing (abc), benefits of activity-based costing (abc).

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Activity-Based Costing (ABC): Method and Advantages Defined with Example

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product.

Key Takeaways

• Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. 
• The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.
• An activity is a cost driver , such as purchase orders or machine setups. 
• The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity. 

ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

Investopedia / Theresa Chiechi

Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.

This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. Activity-based costing is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

The formula for activity-based costing is the cost pool total divided by cost driver, which yields the cost driver rate. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity. 

The ABC calculation is as follows:  

• Identify all the activities required to create the product. 
• Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing. Calculate the total overhead of each cost pool.
• Assign each cost pool activity cost drivers, such as hours or units. 
• Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. 
• Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate. 
• Multiply the cost driver rate by the number of cost drivers. 

As an activity-based costing example, consider Company ABC that has a $50,000 per year electricity bill. The number of labor hours has a direct impact on the electric bill. For the year, there were 2,500 labor hours worked, which in this example is the cost driver. Calculating the cost driver rate is done by dividing the $50,000 a year electric bill by the 2,500 hours, yielding a cost driver rate of $20. For Product XYZ, the company uses electricity for 10 hours. The overhead costs for the product are $200, or $20 times 10.

Activity-based costing benefits the costing process by expanding the number of cost pools that can be used to analyze overhead costs and by making indirect costs traceable to certain activities. 

The ABC system of cost accounting is based on activities, which are any events, units of work, or tasks with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, consumed power, purchase orders, quality inspections, or production orders.

There are two categories of activity measures: transaction drivers, which involve counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete.

Unlike traditional cost measurement systems that depend on volume count, such as machine hours and/or direct labor hours, to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are, to a certain extent, unrelated to how many units are produced. These levels include batch-level activity , unit-level activity, customer-level activity, organization-sustaining activity, and product-level activity.

Activity-based costing (ABC) enhances the costing process in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-wide pool, it pools costs by activity. 

Second, it creates new bases for assigning overhead costs to items such that costs are allocated based on the activities that generate costs instead of on volume measures, such as machine hours or direct labor costs. 

Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation , utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products.

Chartered Global Management Accountant. " Activity-Based Costing (ABC) ."

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Indirect Cost: Definition and Example

To facilitate preparation of an indirect cost proposal, shown below are (1) some definitions of the term "indirect costs," (2) a brief discussion of indirect cost rate structures and (3) a simple example of an indirect cost rate computation.

Indirect Costs (definition extracted from FAR Part 31.2)

An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost. After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to the several cost objectives. An indirect cost shall not be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective.

In simpler terms, indirect costs are those costs not readily identified with a specific project or organizational activity but incurred for the joint benefit of both projects and other activities. Indirect costs are usually grouped into common pools and charged to benefiting objectives through an allocation process/indirect cost rate.

An indirect cost rate is simply a device for determining fairly and expeditiously the proportion of general (non-direct) expenses that each project will bear. It is the ratio between the total indirect costs of an applicant and some equitable direct cost base.

Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs).

Commercial (for-profit) organizations usually treat "fringe benefits" as indirect costs. These fringe benefits are applied to direct salaries charged to projects either through a fringe benefit rate or as part of an overhead/indirect cost rate. Therefore, fringe benefits treated as indirect costs should not be included as a direct cost in the "Personnel" category of the budget form of the grant application or on a contract proposal.

The indirect cost base or bases (that is, the denominator(s) of the fraction producing a rate) should be selected so as to permit an equitable distribution of indirect costs to the benefiting cost objectives.

Generally, indirect cost rate structures for commercial organizations follow a single, two-rate (for example, fringe and overhead rates), or three-rate (for example, fringe, overhead, and General and Administrative expense rates) system. A single rate structure is illustrated below.

* Includes costs associated with independent (self-sponsored) research and development (IR&D) activities.

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Assignment of Reference Data Sets to Reference Objects

You can assign the reference data sets to reference objects using the Manage Reference Data Set Assignments page. For multiple assignments, you can classify different types of reference data sets into groups and assign them to the reference entity objects.

The assignment takes into consideration the determinant type, determinant, and reference group, if any.

Determinant Types

The partitioned reference data is shared using a business context setting called the determinant type. A determinant type is the point of reference used in the data assignment process. The following table lists the determinant types used in the reference data assignment.

Determinant

The determinant (also called determinant value) is a value that corresponds to the selected determinant type. The determinant is one of the criteria for selecting the appropriate reference data set.

Reference Groups

A transactional entity may have multiple reference entities (generally considered to be setup data). However, all reference entities are treated alike because of similarity in implementing business policies and legal rules. Such reference entities in your application are grouped into logical units called reference groups. For example, all tables and views that define Sales Order Type details might be a part of the same reference group. Reference groups are predefined in the reference groups table.

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• A CFA is an investment professional who has earned the Chartered Financial Analyst designation from the CFA Institute.
• You have to fulfill education and work experience requirements, as well as pass three exams, to become a CFA.
• You'll find CFA charterholders working mostly in positions related to investing.

The world of finance encompasses many specialties, job titles, functions, and practices related to money and investment. You'll often see a financial professional with one or more abbreviations following their name. This indicates they have completed additional training and specialization in specific areas of finance.

One of the highest distinctions among those who work within the investment industry is the CFA. Here is a closer look at what a CFA is and how one earns this designation.

What is a CFA? 

CFA stands for Chartered Financial Analyst. It indicates that someone has earned a CFA charter from the CFA Institute, a nonprofit organization that aims to advance ethics, market integrity, and professional standards for investment management practitioners. CFA charterholders have completed the full CFA program, which includes meeting educational requirements, passing three exams, and gaining a set number of hours of work experience.  

"Many in the financial services industry consider it to be the investment profession's most rigorous and esteemed credential, as it relates to investment valuation and portfolio construction," says Christopher Sorrow, vice president and CFA charterholder with Probity Advisors . "The designation signifies that the individual has successfully passed the academic curriculum and experience requirements that the CFA Institute has designed to illustrate investment management and finance proficiency."

A CFA charterholder is qualified to work in a range of senior and executive jobs in the investment industry. Professionals holding this designation help businesses and clients make investment decisions and trade securities. Common jobs where having a CFA charter provides an advantage include: 

• Portfolio management
• Risk analysis and/or management
• Investment banking
• Sales and trading

Those who pursue a CFA designation often already manage portfolios or wealth, research and analyze investments, make decisions regarding investments, or are finance students intent on moving into the investment field.   

Pay for CFA charterholders varies based on region, type of job, and compensation incentives, such as bonuses. The CFA Institute lists the base salary for a portfolio manager with a CFA charter at around $126,000 and total compensation at $177,000, based on a 2019 self-reported survey. 

The path to becoming a CFA

There are several steps to earning a CFA charter. The first is meeting one of the following prerequisites for enrolling in the program:

• Completing a bachelor's degree program or one that is comparable
• Being an undergraduate with 23 months or less until completing your degree
• Having completed a minimum of 4,000 hours of combined work and/or education experience obtained over the course of at least three consecutive years Quick tip: All CFA candidates must hold a valid passport. If you don't have one, you won't be able to register for or take the exams needed to earn your charter. 

Next, you'll have to pass three exams that are broken down into three separate levels and must be completed in sequence. To pass these exams, expect to complete more than 900 hours of self study of topics within 10 areas of investment and finance. Your scores will not expire, so you can plan out when you take each test to coincide with when you feel most prepared to pass.    

The exams are notorious for their rigor. 

"Overall, the CFA examinations are difficult," says Samuel Gottlieb, CFA and CFA senior content specialist with UWorld . "But candidates who study for more than 300 hours, use alternate prep resources, answer as many practice questions as possible, and create a systematic study strategy can improve their chances of passing."

Third, you will have to complete a minimum of 4,000 hours of qualified work experience. This can be attained before, during, or after your participation in the CFA program. Then, you'll need to apply for a CFA Institute membership, which will include providing letters of reference. 

Once you've completed all of these steps, you can apply to become a CFA charterholder. Here's a closer look at each of these steps.    

The CFA exam levels I, II, and III

The CFA program provides a full curriculum to help candidates prepare for and pass three comprehensive exams: Level I, Level II, and Level III. Topic areas include:

• Ethical and professional standards
• Quantitative methods
• Financial statement analysis
• Corporate issuers
• Equity investments
• Fixed income
• Derivatives
• Alternative investments
• Wealth planning

The Level I exam is given over two sessions of 2.25 hours each. There are 180 multiple choice questions covering most of the topics above. Each topic area carries a different weight for scoring, and you'll only get a total score for completing the exam after both sessions are complete. 

The Level II exam is also broken into two sessions, both 2.2 hours each. There are 88 total questions split between the two exams. While they are all multiple choice, the questions ask you to read a vignette and answer questions based on that specific information. You'll be tested on the same topics as Level I, but the questions are weighted differently. 

"The highest-weighted topics for 2022 Level II with topic weights of 10 to 15 percent are: ethical and professional standards, financial statement analysis, equity investments, fixed income, and portfolio management," advises Gottlieb. 

The Level III exam is markedly different from the other two. It's broken into two sessions that are each 2.2 hours long. There are 44 multiple choice questions and vignettes like with the Level II exams. But you'll also find questions that ask you to give a numerical response or provide an essay explaining your reasoning. 

Results are available between 60 and 90 days of completing an exam. According to the CFA Institute, the 10-year average pass rate is between 41% and 52%, depending on which level you take.  

"CFA Program exam results do not expire, and you are not required to enroll each year," Gottlieb says. "Candidates are permitted to take as much time between exams as they choose.  There is no limit to the amount of time required to complete the CFA program."

Experience requirements

The CFA program requires candidates to complete at least 4,000 hours of qualified work experience over a minimum of 36 months. It must be directly related to the investment-decision making process or producing work that informs or adds value to the process, according to Gottlieb.

"Experience earned through full-time, part-time, or remote work arrangements—before, during, or after the applicant's participation in the CFA program—can qualify," Gottlieb says.

This kind of work experience is one of the criteria for enrolling in the CFA program, but this can be circumvented if you have the requisite education. 

Submit letters of reference

You will have to submit several letters of reference to qualify for a CFA charter. Plan on asking for two to three letters from professional sources who can speak to your experience and character regarding the investment decision-making process. 

Jonathan Maroko, CFA and consulting CFO with Burkland, advises going with two references if one is an active regular member of the local CFA society to which you are applying and three if none of them are. 

"I don't think you need to worry about having the 'most impact,' the same way you might if applying to graduate school," Maroko adds.

Apply to become a CFA charterholder

To become a CFA charterholder, you're really applying to be a CFA Institute member. You will have to complete all of the steps detailed above, then apply for membership. Once approved, you will be a CFA charterholder.  

How much does it cost to become a CFA? 

Here are the costs you can expect to pay on your path to becoming a CFA:

• $350 one-time fee to enroll in the program and register for the Level I exam
• $940 to $1,250 to register for each exam, depending on whether you sign up in time for an early bird discount 
• $250 rescheduling fee if you need to change your test date

"Candidates should also budget for miscellaneous expenses like CFA study materials, a CFA-approved calculator, travel and accommodations to reach a testing center, and potential exam retake fees if they fail a section," says Stephanie Ng, CPA, CFO, and author of " I Pass Finance Exams . "

Before you get sticker shock from all these fees, remember it will take at least three years to complete all the requirements needed to qualify for a CFA charter. You can go at your own pace, so you can also spread out the costs.

Benefits of the CFA Designation

Career advancement opportunities .

Earning the CFA designation can open up many new possibilities, giving the charterholder the ability to work in several different fields. As stated previously, these include: 

Earning this designation could open the doors to job opportunities that provide higher compensation in terms of both salary and bonus. It could also enable the charterholder to take part in more sophisticated work. 

Recognition in the global finance community 

Governments around the world, including 40 countries, formally recognize the CFA charter. Regulatory bodies in the U.S., U.K., and Canada, for example, recognize various requirements involved in attaining the aforementioned charter, as they can be counted toward the regulatory requirements that certain financial professionals must meet to perform specific roles in those jurisdictions. 

Enhanced knowledge and skills in investment management 

The comprehensive training involved in studying for the CFA exams can provide a participant with a far more sophisticated knowledge of investment management. The aforementioned training is considered rigorous, and the exams are considered by many to be rather difficult, having a high failure rate. 

By reviewing several subtopics involved with investment management, and obligating charterholders to abide by strict ethics, the CFA program can ensure that those who receive this designation hold high standards. 

Areas of Expertise for CFA Charterholders 

Portfolio management .

Portfolio manager is one of the positions most frequently held by CFA charterholders. However, interested parties should keep in mind that obtaining this particular position frequently requires one to secure several years' worth of experience as an analyst. 

Individuals who follow this career path can eventually get promoted to positions like Chief Investment Officer or Head of Portfolio Management. 

Investment analysis 

The CFA curriculum covers many different areas that can be leveraged in real-world investment analysis. Regardless of whether the individual currently works in investment management or wishes to get involved, the CFA program can help them get there. 

Wealth management 

Wealth management careers are another popular destination for those holding the CFA charter. Professionals who work in wealth management focus on helping investors who are mass affluent, high net worth or ultra high net worth individuals. 

While you may be learning about the CFA designation for the first time, you might already be familiar with another widely recognized financial certification: the CERTIFIED FINANCIAL PLANNERTM, or CFP® . Those who are CFP® professionals can also be CFA charterholders although it's not a requirement. 

The CFP® certification program focuses on a broad range of topics related to financial planning, advising, and management. Similarly to the CFA program, candidates are required to complete extensive coursework, pass a rigorous exam, and have thousands of hours of professional experience. 

The biggest difference between a CFP® and a CFA charterholder is that the CFA program is focused on the investment area of finance, while CFP® professionals concentrate on financial planning, with investing being one component of that. 

"Financial planners, wealth managers, and financial advisors are typical CFP® jobs," Gottlieb says. "While these certificates are prevalent, the CFP® is more common for a financial advisor because it is better geared to individual financial planning."

"CFAs are experts in financial analysis, with the two most popular jobs being portfolio manager and research analyst and, in addition, working with people who need assistance with investing and asset allocation."

How long does it typically take to complete the CFA Program? 

On average, it takes individuals more than four years to complete all the requirements, although they can technically be completed in less than two years. 

Obtaining the CFA requires meeting strict requirements, including passing three exams that have high failure rates and frequently require hundreds of hours' worth of studying. 

Interested parties must complete specific requirements involving education and/or work experience to enroll in the CFA program. 

The CFA curriculum covers several areas of finance, including financial statement analysis, quantitative methods, economics, ethical and professional standards, equity investments and alternative investments. 

Obtaining a CFA charter can open up doors to new areas of specialization in finance and greater compensation. It can also help industry professionals obtain greater credibility and position themselves as experts in the field. 

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How and when to watch today’s total solar eclipse

The path of totality for Monday’s eclipse will sweep across 15 states, from Texas to Maine from 1.30pm CT and ending at about 3.35pm ET

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The total solar eclipse that will traverse a large chunk of the continental US on Monday, along with parts of Mexico and Canada, will be one of the most spectacular celestial events in recent memory. Here’s what you need to know:

What is a total solar eclipse?

The phenomenon occurs when the moon moves in front of the sun, and blocks its face completely, causing the bright sky to darken to twilight in just seconds. The track of the moon’s shadow is called the path of totality , which for Monday’s eclipse will be about 115 miles wide and sweep across 15 states in the US in a north-east direction, from Texas to Maine, for roughly an hour, beginning at 1.30pm CT and ending at about 3.35pm ET.

How rare is it?

The most recent total solar eclipse in the US was in 2017 , but an interval of only seven years is unusual. The previous one before that took place in 1979, and the next one visible in the contiguous US will not be until August 2044. Only 16 other total solar eclipses have occurred over at least a part of the lower 48 states in the last 155 years.

Didn’t we just have a solar eclipse?

Last October’s stunning “ring of fire” show was what’s called an annular solar eclipse, which occurs when the moon moves directly in front of the sun, but is at or near its farthest point from Earth, so is not large enough to entirely cover the sun’s face. You can find Nasa’s guide to the various types of eclipses here .

Why is this one special?

An estimated 31.6 million people, almost three times as many as in 2017, live in the path of totality – which is longer, and also wider than almost every other total eclipse before it, because the moon is closer to Earth and casts a broader shadow. The time of totality in any given location is also longer. Seven years ago, the longest duration anywhere was two minutes and 42 seconds. On Monday, it will be four minutes and 28 seconds in Torreón, Mexico, while almost every place along the path can expect between three and a half to four minutes of totality.

How can I watch it?

If you live anywhere in the path of totality, or can travel to it, congratulations, you have a front-row seat. Just remember you need eclipse glasses (more on that in a minute) to look up at all times other than the few minutes of full eclipse. But everyone in North America outside the path should be able to see at least a partial eclipse of varying percentages, and Nasa will be livestreaming the entire event here . Here’s the caveat: longer-range weather forecasts call for rain and clouds in many areas of the southern and central US on Monday, so the best viewing could be in the east.

And here is Nasa’s Eclipse Explorer , where you can enter any US address or zip code to find out what will be visible from that location.

What can I expect to see?

You can find Nasa’s guide to the stages of a total solar eclipse here . First contact is when the moon’s outer edge first appears to touch the sun, creating the beginnings of a partial eclipse and a crescent sun reducing in size until totality (second contact). In the moments before totality, look for (in order) shadow bands, Baily’s Beads and a diamond ring, three of the most memorable stages of a total eclipse.

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Shadow bands, says Nasa , are rapidly moving, long, dark bands separated by white spaces that can be seen on the sides of buildings or the ground just before totality; Baily’s Beads are short-lived light rays from the sun streaming through the valleys along the moon’s horizon, and give way to the diamond ring effect, the final, single spot of bright light immediately before the end of any direct sunlight.

The sun’s corona , the outermost part of its atmosphere, can only be seen during the total part of the eclipse, then, following totality, the same effects come in reverse. For most locations, the partial eclipse phase lasts from 70-80 minutes, according to Nasa.

How do I watch safely?

To look at the eclipse directly, you must have special eclipse glasses. Regular sunglasses, frosted or darkened glass, or any other method lacking the necessary eye protection just won’t cut it. Nasa’s must-read eclipse safety guide on the subject says: “Viewing any part of the bright sun through a camera lens, binoculars, or telescope without a special-purpose solar filter secured over the front of the optics will instantly cause severe eye injury.” Don’t do what Donald Trump did in 2017.

Many stores, businesses, schools and libraries are still offering glasses free or at low cost (Google is your friend here), but you need to make sure they are safety rated. The American Astronomical Society warned last month that unsafe fakes and counterfeits were circulating, and has published a handy list of suppliers of safe solar viewers and filters (certified ISO 12312-2 compliant).

Experts advise against taking photographs of the eclipse with a mobile phone (unless it’s protected by a solar filter) because it could damage the camera. Nasa has thoughts here .

What if I don’t have eclipse glasses?

You can make a box pinhole projector following the steps in this video , courtesy of Nasa’s Goddard space flight center. An even simpler method is using anything with a small hole, such as a kitchen colander, to project an image on to the ground. And remember that many places across the entire country, such as science centers and zoos, will be hosting special eclipse events so you can watch the action safely.

• Solar eclipses

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What do animals do during an eclipse? Observers in US zoos hope to find out

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‘I get emotional thinking about it’: US and Canada ready for total solar eclipse

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