Cost Overview

Cost information is used in deciding whether to introduce a new product or discontinue an existing product, assessing the efficiency of a particular operation, and budgeting. Cost information is also used for the valuation of inventory and cost of goods sold.

Different types of cost information are needed for different managerial purposes and decisions. For example, product cost information is used for produce mix and pricing decisions. The cost of serving customer segments will include the cost of activities that support customer service. For management control purposes, an organization may compare actual costs to budgeted costs.

Inside the organization, costs serve two broad purposes: planning and evaluation.

Cost calculations can be tailored to specific purposes. For example, for planning purposes, cost might serve as a reference point for determining the selling price of a prospective product, or might be used in a budgeting model to forecast costs under different levels of production and selling activities. Evaluation purposes occur, for example, when comparing actual costs to budgeted costs or when judging whether a process is efficient compared with the costs of similar internal or external processes.

Multistage process costing systems have the same objective as job order costing systems. Both types of systems assign material, labor, and manufacturing support activity costs to products.

The two types of systems differ on some dimensions. In a job order environment, production requirements vary across different jobs, so production occurs job by job and costs are measured for individual jobs. In addition, cost reports that compare actual to estimated costs may be determined for individual jobs.

In a multistage process environment, production requirements are homogeneous across products or jobs, so production occurs continuously, semi-continuously, or in large batches, and costs are measured for individual process stages. Because of the homogeneous production, cost reports that compare actual to estimated costs are likely to be determined only for individual process stages.