Cost Terms and Concepts

Accounting information systems measure costs that are used for different purposes i.e profit measurement and inventory valuation, decision-making, performance measurement and control. Therefore different types of costs are used in different situations. Because the term ‘cost’ has multiple meanings, a preceding term must be added to clarify the assumptions that underlie a cost measurement. A large terminology has emerged to indicate which cost meaning is being conveyed. Examples include variable cost, fixed cost, opportunity cost and sunk cost. First step to understanding of the basic cost terms and concepts that are used in the management accounting literature.

COST OBJECTS

A cost objects is any activity for which a separate measurement of costs is desired. in other words, if the users of accounting information want to know the cost of something, this something is called a cost object.

Examples of cost objects

  • cost of a product
  • cost of rendering a service to a bank customer
  • cost of rendering a service to a hospital patient
  • cost of operating a particular department or sales territory

Anything for which one wants to measure the cost of resources used.

Cost accounts will be classified them into type of expense (e g. direct labor, direct materials and indirect costs) or by cost behavior (such as fixed and variable costs) and then assigns these costs to cost objects.

Please Read More: Direct Costs, Indirect Costs