Costs are assigned to cost objects for a variety of purposes including pricing, preparing profitability studies, and controlling spending. A cost objectAnything for which cost data are desired. Examples of cost objects are products, customers, jobs, and parts of the organization such as departments or divisions. is anything for which cost data are desired—including products, product lines, customers, jobs, and organizational subunits. For purposes of assigning costs to cost objects, costs are classified as either direct or indirect.

Direct Cost

A direct costA cost that can be easily and conveniently traced to a specified cost object. is a cost that can be easily and conveniently traced to a specified cost object. The concept of direct cost extends beyond just direct materials and direct labor. For example, if Reebok is assigning costs to its various regional and national sales offices, then the salary of the sales manager in its Tokyo office would be a direct cost of that office.

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Indirect Cost

An indirect costA cost that cannot be easily and conveniently traced to a specified cost object. is a cost that cannot be easily and conveniently traced to a specified cost object. For example, a Campbell Soup factory may produce dozens of varieties of canned soups. The factory manager’s salary would be an indirect cost of a particular variety such as chicken noodle soup. The reason is that the factory manager’s salary is incurred as a consequence of running the entire factory—it is not incurred to produce any one soup variety. To be traced to a cost object such as a particular product, the cost must be caused by the cost object. The factory manager’s salary is called a common cost of producing the various products of the factory. A common costA cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot’s wage is caused by any one passenger taking the flight. is a cost that is incurred to support a number of cost objects but that cannot be traced to them individually. A common cost is a type of indirect cost.

A particular cost may be direct or indirect, depending on the cost object. While the Campbell Soup factory manager’s salary is an indirect cost of manufacturing chicken noodle soup, it is a direct cost of the manufacturing division. In the first case, the cost object is chicken noodle soup. In the second case, the cost object is the entire manufacturing division.