Accounting For Dummies®, 4th Edition

11.3. Becoming More Familiar with Costs

The following sections explain important cost distinctions that managers should understand in making decisions and exercising control. Also, these cost distinctions help managers better appreciate the cost figures that accountants attach to products that are manufactured or purchased by the business.

Retailers (such as Wal-Mart or Costco) purchase products in a condition ready for sale to their customers — although the products have to be removed from shipping containers, and a retailer does a little work making the products presentable for sale and putting the products on display. Manufacturers don't have it so easy; their product costs have to be "manufactured" in the sense that the accountants have to accumulate various production costs and compute the cost per unit for every product manufactured. I focus on the special cost concerns of manufacturers in the upcoming section "Assembling the Product Cost of Manufacturers."

Accounting versus economic costs Accountants focus mainly on actual costs (though they disagree regarding how exactly to measure these costs). Actual costs are rooted in the actual, or historical, transactions and operations of a business. Accountants also determine budgeted costs for businesses that prepare budgets (see Chapter 10), and they develop standard costs that serve as yardsticks to compare with the actual costs of a business. Other concepts of cost are found in economic theory. You encounter a variety of economic ...