Chapter 13

Accounting for Costs


Measuring costs: The second-most important thing accountants do

Recognizing the different needs for cost information

Determining the right costs for different purposes

Assembling the product cost of manufacturers

Padding profit by producing too many products

You could argue that measuring costs is the second most important thing accountants do, right after measuring profit. In fact, you need to measure costs in order to measure profit. But really, can measuring a cost be very complicated? You just take numbers off a purchase invoice and call it a day, right? Not if your business manufactures the products you sell, that’s for sure! In this chapter, I demonstrate that a cost, any cost, is not as obvious and clear-cut as you may think. Yet, obviously, costs are extremely important to businesses and other organizations.

Consider an example close to home: Suppose you just returned from the grocery store with several items in the bag. What’s the cost of the loaf of bread you bought? Should you include the sales tax? Should you include the cost of gas you used driving to the store? Should you include some amount of depreciation expense on your car? Suppose you returned some aluminum cans for recycling while you were at the grocery store, and you were paid a small amount for the cans. Should you subtract this amount against the total cost of your purchases? Or should you subtract the amount directly against the cost of only the sodas in ...

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