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CHAPTER 2 BASIC COST MANAGEMENT CONCEPTS Although this chapter is somewhat basic, it is very important because it introduces terminology that is used throughout the text. You will not be able to master topics covered in other chapters if you fail to master the basic cost concepts and definitions discussed in this chapter. LEARNING OBJECTIVES After studying Chapter 2, you should be able to: 1. Explain the cost assignment process. 2. Define tangible and intangible products, and explain why there are different product cost definitions. 3. Prepare income statements for manufacturing and service organizations. 4. Explain the differences between traditional and contemporary cost management systems. KEY TOPICS The following major topics are covered in this chapter (related learning objectives are listed for each topic): 1. Cost Assignment: Direct Tracing, Driver Tracing, and Allocation (LO1) 2. Product and Service Costs (LO 2) 3. External Financial Statements (LO 3) 4. Functional-Based and Activity-Based Cost Management Systems (LO 4) II. COST ASSIGNMENT: DIRECT TRACING, DRIVER TRACING, AND ALLOCATION The section introduces and clarifies several concepts and terms relating to cost and the assignment of cost. 1. Cost: The cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization. 2. Expense: An expired cost or a cost used up in the production of revenues (e.g., merchandise inventory of a retailer). 3. Cost object: Any item for which costs are measured and assigned. Examples include products, customers, departments, projects, activities, and so on. For example, a bicycle is a cost object when you are determining the cost to produce a bicycle. 4. Activity: A basic unit of work performed within an organization (e.g., setting up equipment, moving materials, maintaining equipment, and designing products). 7
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5. Traceability: The ability to assign a cost to a cost object in an economically feasible way by means of a causal relationship. 6.
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This note was uploaded on 02/08/2010 for the course ACTG 3000 taught by Professor C during the Spring '10 term at Oregon State.

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