CHAPTER 2AN INTRODUCTION TO COST TERMS AND PURPOSESLEARNING OBJECTIVES1Define and illustrate a cost object2Distinguish between direct costs and indirect costs3Explain variable costs and fixed costs4Interpret unit costs cautiously 5Distinguish among manufacturing companies, merchandising companies, and service-sector companies6Describe the three categories of inventories commonly found in manufacturing companies7Differentiate between inventoriable costs and period costs 8Explain why product costs are computed in different ways for different purposes9Present key features of cost accounting and cost managementCHAPTER OVERVIEWChapter 2 provides concepts and terms, the tools for working with costs. Two basic concepts are explained: (1) cost is a relative term and must beused in relationship to something, a cost object; and (2) common understanding of the terms and concepts facilitates communication.Costs are critical information in most decisions. Everything has a cost. The critical need for accurate and reliable scorekeeping in which historical costs are properly identified and measured is underscored as decision support. This chapter clearly defines the terms and concepts typically used in identifying costs. As mentioned in Chapter 1, costs are ideally accumulated in a database (data warehouse or infobarn), measured and identified with various labels.These data are assigned (“slice or dice”) to a specific cost object defined for a specific purpose. Chapter 2 uses “the product” of a manufacturing company as an example of cost accounting. A good basic understanding of the terms and concepts introduced in this chapter are essential to an understanding of the concepts contained in this text. The terms, relationships, and models developed in the remaining chapters are built upon the definitions and explanations in this chapter.The classification of costs in Exhibit 2-10 is most useful.