Session 02 - Session 2 Cost Concepts & Terminology Some...

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Session 2
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Some Basic Cost Terminology Cost – resource(s) sacrificed to achieve a specific objective Cost Object – anything of interest for which a measure of cost is desired Some examples of cost objects Cost Object Example Product BMW X5 SUV Service Dealer-support telephone hotline Project Customer BMW of the Main Line, a dealer that purchases a broad range of BMW vehicles Activity Setting up production machines Department Environmental, Health & Safety
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Actual vs Budgeted vs Opportunity Costs An actual cost is the amount of a resource actually used to achieve a goal e.g. wages paid to employees to produce a unit of product A budgeted cost is a predicted (expected) cost An opportunity cost (benefit) is a benefit foregone (a cost avoided) by taking one action rather than another. That is, the opportunity cost of doing one thing is not being able to do another. e.g. the opportunity cost of going to university is the income that could have been earned during those years
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Classifying Costs
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Direct Cost : A cost that can be traced directly and completely to a specific cost object, in a cost-effective way . A direct cost is traced to a cost object Indirect Cost : A cost that cannot be traced directly and completely to a specific cost object. (Indirect costs are also referred to as Overhead costs.) An indirect cost is allocated to a cost object Classification Based on Traceability to a Cost Object
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An example of costs assigned to a cost object:
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Classification Based on Behavior For some purposes it is useful to classify costs on the basis of their relationship with a cost driver. Cost Driver
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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Session 02 - Session 2 Cost Concepts & Terminology Some...

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