Cost assignment definition
/What is Cost Assignment?
Cost assignment is the allocation of costs to the activities or objects that triggered the incurrence of the costs. The concept is heavily used in activity-based costing, where overhead costs are traced back to the actions causing the overhead to be incurred. The cost assignment is based on one or more cost drivers.
Cost assignments are associated with direct costs and indirect costs. Assignments of costs differ, based on which cost has been incurred. These differences are as follows:
Assignment of direct costs. Direct costs can be traced directly to a cost object. For example, the valve used on a basketball is a direct cost of the basketball, since it is an item that is directly incorporated into the product. These costs are assigned to cost objects based on a bill of materials (in the case of materials) or a time sheet (in the case of labor).
Assignment of indirect costs. Indirect costs cannot be traced directly to a cost object. For example, the cost of the materials manager who schedules production activities for a number of different products cannot be directly assigned to each of the products manufactured. Instead, these costs are assigned to cost objects using a reasonable basis of allocation.
Examples of Cost Assignments
Here are five examples of cost assignments being used in a variety of different situations:
Direct materials cost assignment. In a furniture manufacturing company, the cost of wood used to produce tables is directly assigned to the "tables" product line. Since the wood is a direct material, its cost can be easily traced and assigned to the specific product that consumes it. This approach ensures accurate product costing and helps in pricing decisions.
Direct labor cost assignment. A custom software development firm assigns the wages of programmers directly to specific client projects based on the hours worked. By tracking labor hours per project, the company can allocate payroll expenses accurately, providing clear insights into project profitability. This type of cost assignment helps in evaluating the efficiency of labor resources.
Manufacturing overhead cost assignment. In an automotive plant, costs like factory rent, utilities, and equipment maintenance are assigned to various car models produced. Since these costs cannot be directly traced to individual cars, they are allocated using a cost driver such as machine hours or labor hours. This ensures that each product line bears a fair share of overhead costs.
Service department cost assignment. In a hospital, costs of support departments like laundry and maintenance are assigned to revenue-generating departments, such as surgery and radiology, based on usage metrics like square footage or service hours. This allocation helps in determining the true cost of running each department and aids in setting appropriate billing rates for medical services.
Sales and marketing cost assignment. A retail company assigns advertising and promotional costs to specific product categories based on sales volume or revenue contribution. For instance, if the footwear category generates 30% of total sales, a proportionate share of marketing expenses is assigned to it. This method helps in analyzing the effectiveness of marketing efforts for each category.
These examples illustrate how cost assignment works in different industries and helps in accurate cost measurement, pricing, and profitability analysis.
Terms Similar to Cost Assignment
Cost assignment is also known as cost allocation.