Traceable costs

A traceable cost is a cost for which there is a direct, cause-and-effect relationship with a process, product, customer, geographical area, or other cost object. If the cost object goes away, then the traceable cost associated with it should also disappear.

A traceable cost is important, because it is an expense that you can reliably assign to a cost object when constructing an income statement showing the financial results of that cost object. It is also useful to understand when cutting back on expenses, so that you can focus on eliminating certain cost objects, for which the related expenses will also be eliminated. Thus, a traceable cost is an expense management tool.

Examples of traceable costs are:

Traceable Cost Cost Object
Advertising Product, Product Line, or Company
Liability Insurance Company or Subsidiary
Marketing Manager Product Line
Rent Product Line
Warehouse Costs Geographical Area

For example, a company is planning to eliminate an entire product line, and wants to understand which expenses will be terminated when the product line is shut down. The costs traceable to the product line include advertising expenses, a marketing specialist, a production line, and a warehouse. All of these costs will be eliminated.

A traceable cost may only be associated with an intermediate level of cost object, and not drill down all the way to the most detailed level. For example, a company may incur the cost of building insurance for its production facility. This cost is only traceable to the building, in that the cost would disappear if the building were to be sold. The cost cannot be traced to the cost objects within the building, such as a production line, since the line could be shuttered but the insurance expense would still be incurred as long as the building was owned by the company.