Definition and Purpose of Cost
Cost is the measurement of resources that must be expended in order to obtain an object or complete an activity. Cost is usually expressed in monetary terms, as in employee time; the materials to manufacture an object may be represented by their monetary value.
Cost normally falls into the domain of managerial accounting and has four essential purposes.
1. It is used for planning for future activities or budgets.
2. It is used for decision making throughout an organization.
3. It is used to compare actual results with budgets and determine why there are variances.
4. It is used to calculate income from the company's operations and projects.
The nature and form of cost can vary across organizations. In the United States, there are three basic types of organizations: manufacturing, retail, and service. Although manufacturing once was the greatest portion of the U.S. economy, the retail sector is also significant, and the service sector now actually makes up the largest portion of the economy.