What does the word cost mean to you?

Is it the price you pay for something of value, like a cell phone? A cash outflow, like monthly rent? Something that affects profitability, like salaries? Organizations, like individuals, deal with different types of costs. They incur costs to generate revenues. Unfortunately, when times are bad and revenues decline, companies may find that they are unable to cut costs fast enough, leading to Chapter 11 bankruptcy. This was the case with apparel chain Aéropostale.

High Fixed Costs Bankrupt Aéropostale^*

In 2015, teen apparel chain Aéropostale announced that it had filed for Chapter 11 bankruptcy. Its high fixed costs—costs that did not decrease as the number of hoodies and t-shirts sold declined—crippled the company.

In the 1990s and early 2000s, Aéropostale saw its logo-centric clothing become a fixture in malls and a favorite of teens who shopped there. During this time, the company rapidly grew to more than 800 stores around the world. This expansion saddled the company with a huge amount of debt. In 2016, as mall traffic tanked and competition from fast-fashion retailers like H&M, Forever 21, and Zara intensified, the company collapsed under the weight of its declining sales and high fixed operating costs—like long-term leases and salaries—and debt-servicing payments. After declaring bankruptcy, Aéropostale quickly closed hundreds of stores and began to feature more non-logoed merchandise to set it apart from competitors such as Abercrombie & Fitch and American Eagle.

As the story of Aéropostale illustrates, managers must understand their firms’ costs and closely manage them. Organizations as varied as the United Way, the Mayo Clinic, and Sony generate reports containing a variety of cost concepts and terms managers need to understand to effectively run their businesses. This chapter discusses cost concepts and terms that are the basis of accounting information used for internal and external reporting.

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