Traceable costs, also known as direct costs, refer to the expenses that can be directly linked or attributed to a specific cost object. A cost object can be a product, department, project, or any other segment of an organization. In essence, if a cost object were to be eliminated, its associated traceable costs would also disappear.
Examples of traceable costs include:
- Direct Materials: The raw materials that go directly into the production of a specific product.
- Direct Labor: Wages and salaries of workers who are involved directly in the production of a specific product or the delivery of a specific service.
- Specific Advertising: Advertising costs directly linked to promoting a specific product or brand.
- Supplies for a Particular Department: If a department uses specific supplies or tools not shared with others, the costs of those items are traceable to that department.
- Travel Expenses for a Specific Project: If employees undertake travel for a particular project, the costs of that travel can be traced directly to that project.
Contrastingly, common costs, also known as indirect costs or allocated costs, can’t be traced directly to a single cost object. Instead, they support multiple activities or cost objects. Examples include the salaries of corporate executives or the utilities for a factory that produces multiple products. Allocating these costs to specific products or departments often requires estimations or the use of allocation bases.
Example of Traceable Costs
Let’s use a fictional example to illustrate traceable costs.
Scenario: Imagine you manage “TechGadget Co.,” a company that manufactures two products: Smartphones and Smartwatches.
To determine the profitability of each product, you want to track the costs associated directly with each.
- Direct Materials: The cost of the screen, processor, camera, and other components is $150 per smartphone.
- Direct Labor: The labor cost to assemble one smartphone is $50.
- Advertising: You’ve spent $20,000 this year on a marketing campaign specifically for the smartphone.
- Direct Materials: The cost of the strap, screen, battery, and other components is $40 per smartwatch.
- Direct Labor: The labor cost to assemble one smartwatch is $30.
- Advertising: You’ve spent $10,000 this year on a marketing campaign specifically for the smartwatch.
Production Volumes for the year:
- 10,000 smartphones
- 5,000 smartwatches
Calculating Traceable Costs:
- Direct Materials: 10,000 x $150 = $1,500,000
- Direct Labor: 10,000 x $50 = $500,000
- Advertising: $20,000
Total Traceable Costs for Smartphones = $1,500,000 + $500,000 + $20,000 = $2,020,000
- Direct Materials: 5,000 x $40 = $200,000
- Direct Labor: 5,000 x $30 = $150,000
- Advertising: $10,000
Total Traceable Costs for Smartwatches = $200,000 + $150,000 + $10,000 = $360,000
From this analysis, you can directly attribute $2,020,000 in costs to the smartphone production and marketing and $360,000 in costs to the smartwatch production and marketing for the year.
If TechGadget Co. decided to stop producing smartwatches, it would save the $360,000 in traceable costs related to this product. On the other hand, indirect costs, such as the factory rent, administrative salaries, and other overheads, would still remain and need to be allocated to the remaining product(s).