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CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES I. LEARNING OBJECTIVES 1. Define and illustrate a cost object 2. Distinguish between direct costs and indirect costs 3. Explain variable costs and fixed costs 4. Interpret unit costs cautiously 5. Distinguish among manufacturing companies, merchandising companies, and service- sector companies 6. Describe the three categories of inventories commonly found in manufacturing companies 7. Distinguish inventoriable costs from period costs 8. Explain why product costs are computed in different ways for different purposes 9. Describe a framework for cost accounting and cost management II. CHAPTER SYNOPSIS Chapter 2 defines and explains important cost accounting terms and concepts that will be discussed in the following chapters. Understanding the concepts and terms discussed in this chapter is a prerequisite to successfully completing the remaining chapters of the text. One guiding principle is that the term “cost” is a relative term, dependent both on the “cost object” chosen and the purpose for which cost is being calculated and reported. Costs are a critical element in most business decisions. Students also need to recognize that companies pay particular attention to costs because every dollar in cost reduction is one more dollar of operating income, whereas one more dollar of sales does not necessarily result in the same impact due to the additional costs that may be incurred in generating those sales. “Cost” is often actually “estimated cost” due to difficulties involved in cost tracing and allocation, relevant range issues, which cost method is used, and the cost-benefit approach to measuring costs. Although there are certain standard costing and reporting methods followed by all companies, different companies calculate and report the same types of data differently depending on their industry and sector. Companies commonly operate in the merchandising, manufacturing, and service sectors. III. CHAPTER OUTLINE 2-1 LEARNING OBJECTIVE #1 LEARNING OBJECTIVE #1: Define and illustrate a cost object.
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Managers use cost information to help guide them in their business decisions. Cost is defined as a resource sacrificed or given up to achieve a specific objective. Accountants define cost in monetary terms, using historical or actual activity data as opposed to planned or predicted future activity. The particular “thing” (product, service, item, etc.) for which managers are trying to determine cost is called the cost object . Do Chapter Quiz #1. One major cost dimension categorizes costs as direct or indirect costs. Direct costs are costs related to the cost object that can be traced to the cost object in a cost-effective manner. If the cost is related to the cost object but can’t be traced in a cost-effective manner it is referred to as an indirect cost . Assignment of indirect costs is more problematic due to the need for estimates
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