Generally speaking by cost we mean total amount of money or other resources foregone or sacrificed to procure something or to achieve some objective. Word expense is also used to denote almost the same meaning. The difference between these two is that when benefit of resources given up can be realized in future, we refer to them as cost. But where resources given up have no future potential benefit we call them as expense. “A cost is an unexpired expense and an expense is an expired cost” is a simple and common way to distinguish between these two. This distinction between cost and expense is most commonly applied in financial accounting. What does the term cost means in cost accounting and in management accounting is explained here.
In cost and management accounting word cost is used in such a variety of ways that it has become extremely difficult to give it a precise meaning without some adjective or qualifying phrase. We speak of direct cost, prime cost, fixed cost, controllable cost, joint cost, standard cost, marginal cost etc. etc. Keeping in view such diverse uses of the word cost, The Committee on Cost Concepts and Standards of American Accounting Association has given a broad definition of cost, so that it may cover all of the various types of costs as are used by the accountants. The committee defines cost as:
“Cost is foregoing measured in monetary terms, incurred or potentially to be incurred to achieve a specific cost object or cost objective”
What does this definition implies is that the expression cost has meaning only when kis related to an object. The cost object may be a product or service, it may be an activity or operation, cost object may be a department or process and so on. Cost object or cost objective means an item or activity or division for which we make a separate measurement of costs. Cost objectives are developed to guide the decision makers and to form the bases of classification of cost e.g. manufacturing costs of a product, or direct and indirect costs of a department.
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