Cost Accounting

What is Cost Tracing – Meaning and Purpose of Cost Tracing

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?

  • Costs must be known for all activities within the costing hierarchy. This is the reason for making cost tracing a necessary part of a costing activity.
  • Cost tracing allows us to understand how the costing process and costing hierarchy were developed.
  • Cost tracing allows us to compare costs between cost centres.
  • Cost tracing is a part of the process that is responsible for estimating the costs of a project. Cost tracing allows us to see if costs are within acceptable limits.

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: Modern production processes can be complex, involving multiple stages and cost drivers, which makes it difficult to trace costs accurately. As a result, the identification and assignment of direct costs to cost objects can be challenging.

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.

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