Nature of Cost - Accounting Media

Nature of Cost

There is not a universal definition of the term, “cost”. Accountants, economists, engineers and others, to suit their individual needs, have developed a number of cost concepts. One general definition of cost is: cost is a forgoing or sacrifice, measured in monetary terms, incurred or potentially to be incurred; to achieve a specific purpose.

Their basic features inherent in this definition are:
1.Cost is the measurement of a foregoing or a sacrifice. The forgoing or sacrifice is represented by a current or future decrease in cash or other assets (resources) or an increase in current or future liabilities.

2. The uses of resources are measured in monetary terms. Resources that constitute the element of cost are material, labour service and other services.

3. Since a forgoing or a sacrifice is made to secure some specific benefit, cost should be measured in the context of the stated objective.

The traditional cost accounting system recognized only one purpose of cost:- stock (inventory) valuation and profit determination. This purpose underscores the historical concept of cost. The modern systems of management, on the other hand, are future or predicted costs are, therefore, measured for planning and control and other decision making purpose.