Why do managers consider direct costs to be more accurate than indirect costs? A. Cost tracing, which is used when assigning direct costs to a particular cost object, is more accurate than cost allocation, which is used to assign indirect costs to the same cost object. B. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object, and therefore, direct costs are considered to be more accurate. C. Allocating indirect costs is more subjective and generally more difficult to assign to a cost object than are direct costs. Therefore, direct costs are deemed by managers to be more accurate costs than indirect costs. D. All of the above.

Question

Luciana Flores

Business

28 February, 10:35

Why do managers consider direct costs to be more accurate than indirect costs? A. Cost tracing, which is used when assigning direct costs to a particular cost object, is more accurate than cost allocation, which is used to assign indirect costs to the same cost object. B. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object, and therefore, direct costs are considered to be more accurate. C. Allocating indirect costs is more subjective and generally more difficult to assign to a cost object than are direct costs. Therefore, direct costs are deemed by managers to be more accurate costs than indirect costs. D. All of the above.

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Keshawn Ballard · Answer 1

D. All of the above

Explanation:

The reason why managers consider direct costs to be more accurate than indirect costs includes all of the following:

A. Cost tracing, which is used when assigning direct costs to a particular cost object, is more accurate than cost allocation, which is used to assign indirect costs to the same cost object.

Cost tracing is a cost-to-product matching process which directly matches costs to a product being produced, whereas cost allocation uses estimates to apply costs to products.

Direct costs are directly traceable to products, while indirect costs change on a per-unit basis and are allocated or apportioned.

B. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object, and therefore, direct costs are considered to be more accurate.

Indirect costs are allocated through the use of 'cost allocation base'. A cost allocation base is the basis on which Cost accounting managers perform the allocation of overhead costs, which are all in quantity forms like machine hours, kilowatt hours (kWh), or occupied square foots. There are concern that these cost allocation bases may not be very accurate.

C. Allocating indirect costs is more subjective and generally more difficult to assign to a cost object than are direct costs. Therefore, direct costs are deemed by managers to be more accurate costs than indirect costs. Looking at the cost allocation bases mentioned above, it is very clear that all of those basis for allocation of costs are subjective which is why activity-based costing prefers the concept of cost-drivers.