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    This chapter introduces fundamental cost accounting concepts and terminology. It defines costs as resources sacrificed to achieve objectives and distinguishes between actual, budgeted, and forecasted costs. Direct costs are explicitly tied to a cost object, while indirect costs are related but cannot be feasibly traced. Variable costs fluctuate with activity levels, whereas fixed costs remain constant. Cost drivers and relevant ranges are also introduced to explain cost behavior. The chapter concludes by defining prime costs, conversion costs, and unit costs, while cautioning the careful use of averages. Exercises are provided to help apply these foundational cost accounting principles.

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    Studies in Accounting

    Original Title

    Chapter( 1)

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    This chapter introduces fundamental cost accounting concepts and terminology. It defines costs as resources sacrificed to achieve objectives and distinguishes between actual, budgeted, and forecasted costs. Direct costs are explicitly tied to a cost object, while indirect costs are related but cannot be feasibly traced. Variable costs fluctuate with activity levels, whereas fixed costs remain constant. Cost drivers and relevant ranges are also introduced to explain cost behavior. The chapter concludes by defining prime costs, conversion costs, and unit costs, while cautioning the careful use of averages. Exercises are provided to help apply these foundational cost accounting principles.

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    6 views9 pages

    An Introduction To Cost Terms and Purposes

    Uploaded by

    ahmedarwy1994
    This chapter introduces fundamental cost accounting concepts and terminology. It defines costs as resources sacrificed to achieve objectives and distinguishes between actual, budgeted, and forecasted costs. Direct costs are explicitly tied to a cost object, while indirect costs are related but cannot be feasibly traced. Variable costs fluctuate with activity levels, whereas fixed costs remain constant. Cost drivers and relevant ranges are also introduced to explain cost behavior. The chapter concludes by defining prime costs, conversion costs, and unit costs, while cautioning the careful use of averages. Exercises are provided to help apply these foundational cost accounting principles.

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    © All Rights Reserved
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    of 9

    CHAPTER 1

    An Introduction to
    Cost Terms and
    Purposes

    INTRODUCTION

    This chapter discusses


    cost concepts and terms
    that are the basis of
    accounting information
    used for internal and
    .external reporting

    Costs and Cost


    :Terminology

    Accountants define cost as a


    resource sacrificed or forgone
    .to achieve a specific objective

    An actual cost

    is the cost

    incurred
    as(, a historical or past cost)
    distinguished from a budgeted cost,
    predicted or forecasted cost ) future
    .cost(

    :Direct Cost and Indirect Costs


    Direct costs

    are related to the particular


    cost object and can be traced to it in an
    economically feasible way. For example, the
    cost of cans or bottles is a direct cost of
    .Pepsi-Cola

    Indirect costs

    are related to the


    particular cost object but cannot be traced
    to it in an economically feasible way. For
    example, the salaries of supervisors who
    oversee production of the many different
    soft drink products bottled at a Pepsi plant
    . are an indirect cost of Pepsi-Cola

    Cost-Behavior Patterns:
    :Variable Costs and Fixed Costs
    A variable cost changes in total in proportion to
    changes in the related level of total activity or
    .volume
    Look example P. 9 & figure P. 10.

    A fixed cost remains unchanged in total for a


    given time period
    Look example P. 10 .

    A cost driver is the level of activity or


    volume, that affects costs over a given time
    . span

    Relevant range is the normal activity level or


    volume in which there is a specific relationship
    between the level of activity or volume and the
    . cost in question

    A unit cost, also called an average cost, is


    computed by dividing total cost by the number of
    .units
    Look example PP. 14 - 15 .

    Use Unit Costs Cautiously


    Look example PP. 15 - 16 .

    Prime Costs and conversion Costs


    They are two terms used to describe cost
    classifications in manufacturing costing
    . systems
    Prime costs are all direct manufacturing
    . costs

    Conversion costs

    are all
    manufacturing costs other than direct
    .material costs
    Conversion costs represent all
    manufacturing costs incurred to convert
    .direct materials into finished goods

    :Look at
    :PP. 33 36 ,

    * PROBLEM FOR SELF-STUDY

    .Requirement no.,2 & 3


    :Questions*

    P.40 No. 1,2,4,6,7,&9


    P. 40 & 43: *Exercises

    17 & 14

    End of Chapter One

    &
    GOOD LUCK

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