CHAPTER 2: AN INTRODUCTION TO COST TERMS AND PURPOSES
Document Type : Book Summary
Source : Cost Accounting: A Managerial Emphasis 15th Edition by Charles T.
Horngren, Srikant M. Datar, and Madhav V. Rajan
Learning Objective 1 : Define and Illustrate a Cost Object
Cost object is anything for which a cost measurement is desired. It can be in the form of
products, services, projects, customers, activities, or even departments.
Learning Objective 2 : Distinguish between Direct Costs and Indirect Costs
Direct costs of a cost object are related to the particular cost object and can be traced
to it in an economically feasible (cost-effective) way. The assignment of direct costs to
a particular cost object is called “cost tracing”; while
Indirect costs of a cost object are related to the particular cost object but cannot be
traced to it in an economically feasible (cost-effective) way. The assignment of
indirect costs to a particular cost object is called “cost allocation”.
Learning Objective 3 : Explain Variable Costs and Fixed Costs
Based on cost-behavior patterns, costs can be classified as either:
Variable costs, which change in total in proportion to changes in the related level of
total activity or volume of output produced; or
Fixed costs, which remain unchanged in total for a given time period, despite wide
changes in the related level of total activity or volume of output produced.
Learning Objective 4 : Interpret Unit Costs Cautiously
A unit cost is calculated by dividing the total cost by the related number of units produced.
Unit costs are found in all areas of the value chain. By summing unit costs throughout the
value chain, managers calculate the unit cost of the different products or services they
deliver and determine the profitability of each product or service. Although unit costs are
regularly used in financial reports and for making product mix and pricing decisions,
managers should think in terms of total costs rather than unit costs for many decisions.
Document Type : Book Summary
Source : Cost Accounting: A Managerial Emphasis 15th Edition by Charles T.
Horngren, Srikant M. Datar, and Madhav V. Rajan
Learning Objective 1 : Define and Illustrate a Cost Object
Cost object is anything for which a cost measurement is desired. It can be in the form of
products, services, projects, customers, activities, or even departments.
Learning Objective 2 : Distinguish between Direct Costs and Indirect Costs
Direct costs of a cost object are related to the particular cost object and can be traced
to it in an economically feasible (cost-effective) way. The assignment of direct costs to
a particular cost object is called “cost tracing”; while
Indirect costs of a cost object are related to the particular cost object but cannot be
traced to it in an economically feasible (cost-effective) way. The assignment of
indirect costs to a particular cost object is called “cost allocation”.
Learning Objective 3 : Explain Variable Costs and Fixed Costs
Based on cost-behavior patterns, costs can be classified as either:
Variable costs, which change in total in proportion to changes in the related level of
total activity or volume of output produced; or
Fixed costs, which remain unchanged in total for a given time period, despite wide
changes in the related level of total activity or volume of output produced.
Learning Objective 4 : Interpret Unit Costs Cautiously
A unit cost is calculated by dividing the total cost by the related number of units produced.
Unit costs are found in all areas of the value chain. By summing unit costs throughout the
value chain, managers calculate the unit cost of the different products or services they
deliver and determine the profitability of each product or service. Although unit costs are
regularly used in financial reports and for making product mix and pricing decisions,
managers should think in terms of total costs rather than unit costs for many decisions.
