Case study 1 - Cost object - solution PDF

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ZAGREBAČKA ŠKOLA EKONOMIJE I MANAGEMENTA

ZAGREB SCHOOL OF ECONOMICS & MANAGEMENT

Case study 1 – Cost object Before solving this exercise try answering the following questions. Which costs are considered to be direct and which are consider to be indirect? Exercise CresendoSrl operates a large store in Milan. The store has both a film (video/DVDs) section and a musical (compact disc and tapes) section. Cresendo reports revenues for the film section separately from the musical section. Therefore it is important to identify the accurate amount of costs that are related to each individual section. Required a. Classify each of the following costs as direct or indirect with respect to film section and music section. COST Annual retainer paid to a film distributor Electricity costs of Cresendo store (single bill covers entire store) Costs of films purchased for sale to customers Subscription to Video –Novo magazine Leasing of computer software used for financial budgeting at Cresendo store Cost of popcorn provided free to all customers of Cresendo Earthquake insurance policy for Cresendo store Freight-in costs of films purchased by Cresendo

DIRECT/INDIRECT Direct/ fixed Indirect/ varible Direct/ variable Direct/fixed Indirect/foxed indirect/variable Indirect/fixed Direct/variable

b. For each identified indirect cost, please think of how would you allocate them between movie section and film section (what would you use for allocation base). c. Describe how a given cost can be both a direct cost and a direct cost. Which costs would be classified as indirect costs if identified cost object was store as a whole?

Zagreb, Jordanovac 110, tel. 01/2354 010, fax. 01/2354 155 (Dekanat); tel. 2354 245, fax. 2354 243 (Studentska služba); tel: 4500 311, fax. 4500 312 (Računovodstvo) MB: 1631055 OIB: 96760515998 Žiro-račun: 2484008-1101220226 RBA; RBA IBAN: HR58 2484 0081 1012 2022 6; 2340009-1110073682 PBZ; PBZ IBAN: HR15 2340 0091 1100 7368 2 www.zsem.hr

ZAGREBAČKA ŠKOLA EKONOMIJE I MANAGEMENTA

ZAGREB SCHOOL OF ECONOMICS & MANAGEMENT

Solution Costs are not direct or indirect in isolation. A cost object (such as a product, service or project) must be specified. 

Direct costs of a cost object are those costs that are related to the particular cost object and that can be traced to it in an economically feasible (cost-effective) way.



Indirect costs of a cost object are those costs that are related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) way.

Exercise Cost object: Cost driver: a.

Film section of store. Number of films sold (cost variability: With respect to changes in the number of films sold)

Cost item Annual retainer paid to a film distributor Electricity costs of Cresendo store (single bill covers entire store)

D or I V or F D I

F V

Costs of films purchased for sale to customers Subscription to Video –Novo magazine Leasing of computer software used for financial budgeting at Cresendo store

D D I

V F F

Cost of popcorn provided free to all customers of Cresendo Earthquake insurance policy for Cresendo store

I I

V F

Freight-in costs of films purchased by Cresendo

D

V

b. We can allocate indirect cost between departments based on square footage of each department, sales revenues of each department, equally between departments, etc. c. Consider a supervisor’s salary in a maintenance department of a telephone company. If the cost object is the department, the salary is a direct cost. If the cost object is a telephone call by a customer, the salary is an indirect cost. All cost would be classified as direct costs, if cost object was store.

Zagreb, Jordanovac 110, tel. 01/2354 010, fax. 01/2354 155 (Dekanat); tel. 2354 245, fax. 2354 243 (Studentska služba); tel: 4500 311, fax. 4500 312 (Računovodstvo) MB: 1631055 OIB: 96760515998 Žiro-račun: 2484008-1101220226 RBA; RBA IBAN: HR58 2484 0081 1012 2022 6; 2340009-1110073682 PBZ; PBZ IBAN: HR15 2340 0091 1100 7368 2 www.zsem.hr

ZAGREBAČKA ŠKOLA EKONOMIJE I MANAGEMENTA

ZAGREB SCHOOL OF ECONOMICS & MANAGEMENT

Zagreb, Jordanovac 110, tel. 01/2354 010, fax. 01/2354 155 (Dekanat); tel. 2354 245, fax. 2354 243 (Studentska služba); tel: 4500 311, fax. 4500 312 (Računovodstvo) MB: 1631055 OIB: 96760515998 Žiro-račun: 2484008-1101220226 RBA; RBA IBAN: HR58 2484 0081 1012 2022 6; 2340009-1110073682 PBZ; PBZ IBAN: HR15 2340 0091 1100 7368 2 www.zsem.hr...