ch2 - Chapter 2 Basic Cost Terms How much does it cost? The...

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Chapter 2 Basic Cost Terms How much does it cost? The Merriam Webster Dictionary lists a number of different definitions for ‘cost,’ many which are associated with specific situations. The answer depends on why you want to know and for what purpose the ‘cost’ is needed. You may recall a number of ‘costs’ from financial accounting such as historical cost, invoice cost, and acquisition cost. Because this text’s initial focus begins with the production of products, our definition of cost will include several variations based on how a cost pertains to production. This chapter introduces you to some of the cost terms that will be used throughout the textbook. Don’t take this chapter (and the next) lightly. Thoroughly understanding these costs will help you immensely throughout your study of managerial accounting. ‘Cost’ as a Financial Accounting Concept For financial reporting purposes, a cost can be an asset or an expense. Costs that are expected to produce future economic benefits are considered assets and are reported on the balance sheet. Costs that are not expected to produce future economic benefits are considered expenses and are reported on the income statement. A more practical definition may be more useful to you. Assets are unused resources, i.e., costs that are not used up. Expenses are resources (costs) that are used up. Many costs begin as assets and become expenses as they are used. Costs (expenses) are matched to the related revenues for which they helped to earn. Some costs are used so quickly that they become expenses when acquired. You will examine the timing of costs later in the chapter. Cost Terms Based on Behavior: Fixed and Variable Costs Because managers use cost information to make decisions, it is useful to know how costs behave so you can predict future behavior. Costs designated as variable and fixed are based on cost behavior, which is how the total costs react to changes in activity. Activity is most often the number of units produced and sold. As it pertains to variable and fixed costs at this point in the course, you can assume that the number of units produced is the same as units sold. When labeling a cost as variable or fixed, you must assume
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ch2 - Chapter 2 Basic Cost Terms How much does it cost? The...

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