The meaning of cost and how costs are assigned to products and services.
Meaning of cost
COST is the amount of cash or cash equivalent sacrificed for goods and/or services that
are expected to bring a current or future benefit to the organization. Managers use cost
information to determine the cost of products, services, customers, and other items of
interest to managers.
As costs are used up in the production of revenues, they are said to expire. Expired costs
are called EXPENSES. For a company to remain in business, revenues must be larger than
expenses. PROFIT = REVENUES - EXPENSES
Price Refers to the revenue per unit
The way that costs are measured and recorded. It tells the
Accumulating Costs
company what was spent.
The way that a cost is linked to some cost object. Assigning costs
Assigning Costs
tells the company why the money was spent.
Is anything that a company wants to measure and assign costs,
Cost Object such as a product, customer, department, project, geographic
region, or plant.
, 2
Assigning costs to cost objects
Costs can be assigned to cost objects in many ways – some methods are more accurate
+ others are simpler. The objective is to measure and assign costs as well as possible.
- Easily and accurately traced to cost object
Direct Costs - Easy to trace = physically observed + easy to track
e.g. DL, DM, commissions, piece rate wages & manufacturing supplies.
Indirect/
- Cannot be easily and accurately traced to a cost object
Overhead/
e.g. supervision salaries, quality control costs, insurance & depreciation
Support Costs
- Indirect cost is assigned to a cost object by using a reasonable and
Allocation
convenient allocation method or basis.
Other cost - Costs analysed with respect to their behaviour patterns, or the way
categories a cost changes when the level of output changes.
- Costs that ↑ in total as output ↑ and ↓ in total as output ↓
Variable costs
e.g. the denim used in making jeans is a variable cost.
- Costs don’t ↑ in total as output ↑ and do not ↓ in total as output ↓
Fixed Costs e.g. Building renting stays the same no matter how many pairs of jeans
are made.
- The benefit given up or sacrificed when one alternative is chosen
over another.
Opportunity e.g. An opportunity cost might be choosing between two brands of
cost bread at the store. If you buy one loaf that costs seven rand more than
another, that difference of seven rand is the opportunity cost of buying
your preferred bread.
Meaning of cost
COST is the amount of cash or cash equivalent sacrificed for goods and/or services that
are expected to bring a current or future benefit to the organization. Managers use cost
information to determine the cost of products, services, customers, and other items of
interest to managers.
As costs are used up in the production of revenues, they are said to expire. Expired costs
are called EXPENSES. For a company to remain in business, revenues must be larger than
expenses. PROFIT = REVENUES - EXPENSES
Price Refers to the revenue per unit
The way that costs are measured and recorded. It tells the
Accumulating Costs
company what was spent.
The way that a cost is linked to some cost object. Assigning costs
Assigning Costs
tells the company why the money was spent.
Is anything that a company wants to measure and assign costs,
Cost Object such as a product, customer, department, project, geographic
region, or plant.
, 2
Assigning costs to cost objects
Costs can be assigned to cost objects in many ways – some methods are more accurate
+ others are simpler. The objective is to measure and assign costs as well as possible.
- Easily and accurately traced to cost object
Direct Costs - Easy to trace = physically observed + easy to track
e.g. DL, DM, commissions, piece rate wages & manufacturing supplies.
Indirect/
- Cannot be easily and accurately traced to a cost object
Overhead/
e.g. supervision salaries, quality control costs, insurance & depreciation
Support Costs
- Indirect cost is assigned to a cost object by using a reasonable and
Allocation
convenient allocation method or basis.
Other cost - Costs analysed with respect to their behaviour patterns, or the way
categories a cost changes when the level of output changes.
- Costs that ↑ in total as output ↑ and ↓ in total as output ↓
Variable costs
e.g. the denim used in making jeans is a variable cost.
- Costs don’t ↑ in total as output ↑ and do not ↓ in total as output ↓
Fixed Costs e.g. Building renting stays the same no matter how many pairs of jeans
are made.
- The benefit given up or sacrificed when one alternative is chosen
over another.
Opportunity e.g. An opportunity cost might be choosing between two brands of
cost bread at the store. If you buy one loaf that costs seven rand more than
another, that difference of seven rand is the opportunity cost of buying
your preferred bread.
