COST TERMINOLOGY AND COST BEHAVIORS
is used to refer to so many different concepts that an
adjective must be attached to identify which particular type of cost is being
discussed. For example, there are fixed costs, variable costs, period
costs, product costs, expired costs, and opportunity costs, to name just a
A cost object is anything for which management wants to collect or
Direct costs are conveniently and economically
traceable to the cost object whereas indirect costs are not.
must be allocated in some rational and systematic manner to the cost
The assumed range of activity that reflects the company’s normal
operating range is referred to as the relevant range.
Outside the relevant
range, costs may be curvilinear because of purchase discounts, improved
worker skill and productivity, worker crowding, loss in employee efficiency
during overtime hours, etc.
Although a curvilinear graph is more indicative
of reality, it is not as easy to use in planning or controlling costs.
Accordingly, accountants choose the range in which these fixed and
variable costs are assumed to behave as they are defined (linear) and, as
such, represent an approximation of reality.
It is not necessary for a causal relationship to exist between the cost
predictor and the cost.
All that is required is that there is a strong
correlation between movement in the predictor and the cost.
a cost driver is an activity that actually causes costs to be incurred.
The distinction between cost drivers and predictors is important because it
relates to one of the objectives of managers: to control costs.
cost control efforts on cost drivers, managers can exert control over costs.
Exerting control over predictors that are not cost drivers will have no cost
A product cost is one that is associated with inventory.
In a manufacturing
company, product costs would include direct materials, direct labor, and
In a merchandising company, product costs are the costs of
purchasing inventory and the related freight-in costs.
In a service
company, product costs are those costs that are incurred to generate the
services provided such as supplies, service labor, and service-related