Cost Concepts

• Cost is the monetary amount of the resources given up to attain some objective such as acquiring goods and services.
• Out-of-pocket costs involves an actual outlay of cash
• Opportunity cost is the forgone benefit or lost opportunity of the path taken
• Cost drivers is a basis used to assign costs to cost objects
• Direct cost is a cost that can be easily and conveniently traced to a unit of product or other cost object
• indirect costs are costs that cannot be easily and conveniently traced to a unit of product or other cost object
• Common cost is a cost incurred for the benefit of more than one cost object
• Variable cost changes in total, and remains constant per unit
• Fixed costs do not change in total regardless of the activity level that is within the relevant range. Per unit, it decreases as production increases.
• Mixed costs is a combination of variable and fixed costs
• Relevant range assumption refers to the range of activity within which the cost behavior patterns are valid
• The cost is assumed to manifest a linear relationship over a relevant range despite its tendency to show otherwise over the long run
• Y = a + bX
• High-low method computes for the fixed and variable elements by using the highest and lowest points as to activity level or cost driver
• Least square regression method is a statistical technique that investigates the association between dependent and independent variables.
• Activity index identifies the activity that causes changes in the behavior of costs. With an appropriate activity index, a company can classify the behavior of costs into three categories: variable, fixed, or mixed.