ABSTRACT
This chapter overviews of a number of key cost concepts that are frequently used in government and nonprofit organizations. It defines a distinction between terms that frequently appear alongside cost, such as expense, expenditure, depreciation, inflation, and price. Some of these terms, in particular cost, expense, and expenditure, are often used interchangeably, which can create confusion in cost calculations. The chapter explains why it is difficult to determine the price of public goods and, more important, the need for using different pricing methods in government. Cost is central to effective decision making in all organizations – public, private, quasi-public, and nonprofit. Cost classification generally means organizing activities with the same attributes into distinct groups or classes. Depreciation plays a critical role in all cost calculations, especially where physical assets are involved with several years of useful life. The chapter concludes with some basic principles of cost commitments that are useful in cost studies.
