Cost Descriptors

Cost Descriptors Paper

Cost Descriptions Paper

In planning the organization’s yearly budget, all levels of management should fully understand the key accounting terms. Cost accounting outlines to the determination of a product, process or service costs. A subset of managerial accounting, cost accounting relates primarily to the accumulation and determination of product, processes and service costs for the primary purpose of income measurement and inventory valuation in accordance with generally accepted accounting principles (Marshall, 2003). In essence, practical application of cost accounting requires understanding and management of costs at each stage of an organization.

The most basic among accounting terms are fixed costs which are defined as expenses that do not vary depending on production or sales levels, such as rent, property tax, insurance, or interest expense. “Fixed costs are the costs of the investment goods used by the firm, on the idea that these reflect a long-term commitment that can be recovered only by wearing them out in the production of goods and services for sale” (Drexel University, 2006, p.1).

The opposite of fixed costs are variable costs described as business expense that varies in proportion to the quantity of goods sold or manufactured, such as packaging materials or product components. Variable costs tend to decline on a per unit basis as the quantity manufactured or sold increases, due to economies of scale. For example, a marketer might have to spend increasingly greater amounts on advertising and promotion to sustain an artificially high demand level (Answers, 2007). Organizational examples of variable costs are labor costs. The idea is that labor is a much more flexible resource. People can change from one task to another flexibly (whether within the same firm or in a new job at another firm), while machinery tends to be designed for a very specific use.

Fixed and variable expenses can also be direct costs. These costs are expenses such as production materials and labor or sales force salaries that relate directly to the manufacture or sale of a product. For example, direct costs for a store opening are construction materials and labor; indirect costs include architect's fees, interest during construction, insurance, and builder's overhead and profit allowance.

Direct cost and indirect cost are terms used to relate a cost to a product or activity. “Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs” (Department of Education, 2007, p.1). Examples of indirect costs are heat, light, accounting or personnel and can be described, as costs would continue to be incurred even if the product or activity were discontinued.

When producing or manufacturing a product, there are costs that are assessed to all the different components that make up the product. This may either