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CHAPTER 2

INTRODUCTION TO COST TERMS


AND PURPOSES
WHAT IS A COST?

1. A cost is the amount paid to acquire a good or service.


• In this class we will discuss two types of costs:
1. —A cost incurred in the present or past

2. —also called predicted, estimated, or


forecasted costs.
 These are the costs that we think will occur in
the future
COST OBJECTS

2. A is anything for which a measurement


of costs is required.
• These include:
a. —ex: cars, computers, pizzas
b. —ex: audit firms, auto maintenance
labor
c. —ex: production, maintenance,
packing, etc.
COST OBJECTS

3. Costs are assigned to cost objects


 E.g: a factory supervisor oversees the production of
several different products. These are called
costs, and these costs are assigned to objects using a
technique called
. For manufacturing companies, we call these costs:

 Examples include:
I. Utilities
II. Insurance
III. Depreciation
IV. Indirect materials/labor
COST OBJECTS

3. Costs are assigned to cost objects


c. DM, DL, and MOH are called costs
TYPES OF INVENTORY

4. Most manufacturing firms have three types of inventory:


 Raw Materials:
 resources in stock and available for use
 Work in Process:
 Products started but not yet completed
 Finished Goods:
 Completed products ready for sale
NOT INVENTORIABLE

5. Certain types of costs are not inventoriable because they


are not related to production, or the benefit of the cost
is very uncertain.

 These costs are called costs


INVENTORIABLE COSTS

Direct Materials/ Work in Process Finished Goods


Raw Materials
VARIABLE VS. FIXED COSTS

6. Costs are also classified by their behavior when the amount of production
changes.
 2 General categories:
a. , change in total in response to changes in
level of activity - for example in restaurants:
i. Food, hourly employee wages
ii. These costs are caused by something called a
b. , remain unchanged in total - for
example:
i. Rent, salaried employees
VARIABLE VS. FIXED COSTS

Total Dollars Cost Per Unit


Change in Unchanged in
proportion with relation to
Variable Costs output
output

Change
inversely with
Unchanged in output
Fixed Costs
relation to output
WHAT IS ALL OF THIS GOOD FOR?

7. Cost accounting can be used for a wide


range of applications (for helping
managers make decisions):
1) Calculating the cost of products, services, and other cost
objects
2) Obtaining information for planning and control, and
performance evaluation
3) Analyzing the relevant information for making decisions
WHAT IS ALL OF THIS GOOD FOR?

7. When making a decision, it is important


to consider costs, which are
costs that differ between alternative
courses of action.