Cost tracing is an important part of cost estimation. It allows us to compare costs for a given product between different cost centres.
In order to do this, we need to determine the cost centre that is related to the product. Once this has been done, we should be able to make cost comparisons between them. Cost tracing should be used when an estimate of an activity is required. Cost tracing is often performed after cost estimation.
Cost tracing refers to the assignment of accumulated costs that have a direct relationship to a particular cost object. It is worth noting that cost assignment is a general term for assigning costs, whether direct or indirect, to a cost object. On the other hand, cost tracing is a specific term for assigning direct costs.
Sometimes management has to decide if it is economically feasible to determine if a cost is direct or indirect. It is because the expense of tracing the cost to a cost object may be greater than the benefit of having an accurate value for that cost object.
How is cost tracing performed?
Cost tracing is performed by comparing costs between the cost centres, activities, cost objects, and cost centres. Cost tracing requires knowledge of the costing method, cost centres, activities, and cost objects for the activities. The cost object must also be known. The cost centre that the product is associated with must also be determined. This is done in order to be able to compare costs between activities.
To compare costs, it is necessary to know the cost objects related to the products or activities. Cost tracing requires an object that is related to the product or activity. It is also required to know which cost centre is related to the product or activity. It is also necessary to know the cost centre that is related to the product or activity that is being costed.
What are the purposes of cost tracing?
Accurate Cost Assignment – Cost tracing helps to ensure the correct identification of direct costs and their respective cost objects, reflecting what it truly costs to produce certain products or services.
Enhanced Decision Making – By being aware of the actual cost of products, services, or activities, management can make better decisions regarding pricing, product mix, and allocation of resources.
Improved Profitability Analysis – Cost tracing helps in determining which products, services, or customers are truly profitable by revealing their actual costs.
Better Cost Control – When costs are traced to specific activities or departments, managers can identify inefficiencies and implement targeted cost control measures.
Performance Evaluation – Cost tracing provides data that can be used to evaluate the performance of departments, processes, or managers based on their ability to control costs.
Support for Cost-Based Pricing – Accurate cost information from cost tracing helps in setting prices that ensure products or services are sold at a profit.
Challenges with Cost Tracing
Cost tracing in cost accounting can be challenging due to various reasons. Here are some of the main challenges:
The complexity of modern production processes: Current production processes are complex, with various stages and cost drivers, which complicates the tracing of costs. Therefore, identification and allocation of direct costs to cost objects can be complicated.
Difficulty in assigning indirect costs: Indirect costs are costs that cannot be easily traced to a specific cost object. Assigning indirect costs to cost objects requires careful estimation and allocation, which can be subjective and prone to error.
Accuracy of cost data: The accuracy and completeness of cost data are critical to cost tracing. Inaccurate or incomplete data can lead to incorrect cost assignments and inaccurate costing decisions.
Cost of implementing cost tracing systems: Implementing cost tracing systems, such as enterprise resource planning (ERP) systems or activity-based costing (ABC) systems, can be expensive and time-consuming. Smaller companies may not have the resources to implement such systems, while larger companies may face challenges in integrating these systems with their existing processes.
