Accounting Costs and Cost Measurement

Cost Object and Cost Classification

• A cost object is anything for which a cost measurement is desired.
• A cost is a resource sacrificed or forgone to achieve a specific objective.
• An actual cost is the cost incurred, which is a historical or past cost.
• Costs can be classified as direct or indirect, and a cost may be direct for one cost object and indirect for another.

Direct and Indirect Costs

• Direct costs can be easily traced to a specific cost object.
• Indirect costs are difficult to trace to a specific cost object and are often allocated to multiple cost objects.
• The cost of natural gas used to heat a production facility that makes three products would be classified as an indirect cost when the cost object is one of the products.
• Wood used to manufacture chairs is considered a direct variable cost when the cost object is the chair.

Fixed and Variable Costs

• A fixed cost is fixed only in relation to a given wide range of total activity or volume and only for a given time span.
• A variable cost varies with the level of production or sales volume.
• Fixed cost per unit falls with an increase in production volume.
• A lease for a store with a base monthly rent of $1,500 is a fixed cost for the month for a relevant range of zero to $10,000 sales.

Cost Drivers

• A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given time span.
• Cost drivers causally affect total costs of a cost object over a given time span.

Cost Analysis

• When making decisions for product mix and pricing, the focus should be on total costs and not unit costs.
• Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for making decisions.
• A unit cost is computed by dividing total cost by the number of units and is also called an average cost.

Inventory and Types of Companies

• Manufacturing companies hold three types of inventory: direct materials inventory, work-in-process inventory, and finished goods inventory.
• Work-in-process inventory includes goods partially worked on but not yet completed.
• Merchandising companies, such as department stores, purchase products and sell them to customers without changing their basic form.
• Banks provide services or "intangible products" to their customers.