Cost Terms

Actual Costing

A costing system that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs and allocates indirect costs based on the actual indirect-cost rates times the actual quantities of the cost allocation bases.

normal costing

A costing system that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs and that allocates indirect costs based on the budgeted indirect-cost rates times the actual quantities of the cost-allocation bases.

cost allocation base

A factor that links in a systematic way an indirect cost or group of indirect costs to a cost object.

activity

An event, task, or unit of work with a specified purpose.

Cost Object

Anything for which a measurement of costs is desired.

Activity Based Costing

Approach to costing that focuses on individual activities as the fundamental cost objects. It uses the costs of these activities as the basis for assigning costs to other cost objects such as products or services.

cost-plus pricing

As an example, ABC International has designed a product that contains the following costs: Direct material costs = $20.00 Direct labor costs = $5.50 Allocated overhead = $8.25 The company applies a standard 30% markup to all of its products. To derive the price of this product, ABC adds together the stated costs to arrive at a total cost of $33.75, and then multiplies this amount by (1 + 0.30) to arrive at the product price of $43.88. is a cost-based method for setting the prices of goods and services. Under this approach, you add together the direct material cost, direct labor cost, and overhead costs for a product, and add to it a markup percentage (to create a profit margin) in order to derive the price of the product. Cost plus pricing can also be used within a customer contract, where the customer reimburses the seller for all costs incurred and also pays a negotiated profit in addition to the costs incurred.

Cost Allocation

Assignment of indirect costs to a particular cost object.

Cost Accumulation

Collection of cost data in some organized way by means of an accounting system

Actual Cost

Cost incurred (a historical or past cost), as distinguished from a budgeted or forecasted cost.

Cost of goods manufactured

Cost of goods brought to completion, whether they were started before or during the current accounting period.

Fixed Cost

Cost that remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume.

Predetermined Overhead Rate

Estimated amount of manufacturing overhead to be incurred in the period ÷ Estimated allocation base for the period is an allocation rate that is used to apply the estimated cost of manufacturing overhead to cost objects for a specific reporting period. This rate is frequently used to assist in closing the books more quickly, since it avoids the compilation of actual manufacturing overhead costs as part of the period-end closing process. However, the difference between the actual and estimated amounts of overhead must be reconciled at least at the end of each fiscal year.

Cost Assignment

General term that encompasses both (1) tracing accumulated costs that have a direct relationship to a cost object and (2) allocating accumulated costs that have an indirect relationship to a cost object.

Work in process inventory

Goods partially worked on but not yet completed. Also called work in progress.

Absorbtion Costing

Method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs.

over allocated overhead

Occurs when the actual manufacturing overhead costs are less than allocated manufacturing overhead costs.

under allocated overhead

Occurs when the actual manufacturing overhead costs are more than allocated manufacturing overhead costs.

Budgeted Cost

Predicted or forecasted cost (future cost) as distinguished from an actual or historical cost.

Budget

Quantitative expression of a proposed plan of action by management for a specified period and an aid to coordinating what needs to be done to implement that plan.

Indirect Materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it. are materials used in the production process, but which cannot be linked to a specific product or job. Cleaning supplies Disposable safety equipment Disposable tools Fittings and fasteners Glue Oil Tape

Price

The amount of money exchanged for a good or service

overtime premium

Wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates.

idle time

Wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like.

Total Cost

__ refers to the aggregation of all types of costs related to a cost object, which means fixed costs, variable costs, and mixed costs. For example, the __ of a product line includes not only the variable cost of the goods sold, but also the costs of advertising the products and running the production line on which the goods are manufactured.

Standard Cost

a carefully determined cost of a unit of output

Direct Cost

a cost that can be easily and conveniently traced to a specified cost object

Indirect Cost

a cost that cannot be easily and conveniently traced to a specified cost object

Mixed Cost

a cost that has both fixed and variable cost elements. Also called a semivariable cost.

Cost Pool

a grouping of individual cost items

product undercosting

a product consumes a high level of resources but is reported to have a low cost per unit

Product overcosting

a product consumes a low level of resources but is reported to have a high cost per unit

Cost Driver

a variable, such as the level of activity or volume, that causally affects costs over a given time span.

inventoriable costs

all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold

Prime Cost

all direct manufacturing costs

conversion cost

all manufacturing costs other than direct material costs

Manufacturing cost

are the costs incurred during the production of a product. These costs include the costs of direct material, direct labor, and manufacturing overhead. The costs are typically presented in the income statement as separate line items. An entity incurs these costs during the production process.

Direct Materials

are those materials and supplies that are consumed during the manufacture of a product, and which are directly identified with that product.

Relevant Range

band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question.

Cost Heirarchy

categorization of indirect costs into different cost pools on the basis of the of the different types of cost drivers, or cost allocation bases, or different degrees of difficulty in determining cause and effect (or benefits received) relationships.

Average Cost

cost computed by dividing total cost by the number of units

Unit Cost

cost computed by dividing total cost by the number of units. Also called average cost.

Variable Cost

cost that changes in total in proportion to changes in the related level of total activity or volume

cost-application base

cost-allocation base when the cost object is a job, product, or customer

Product Cross Subsidization

costing outcome where one undercosted (overcosted) product results in at least one other product being overcosted (undercosted).

Standard Costing

costing system that traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities of inputs allowed for actual outputs produced and allocates overhead costs on the basis of the standard overhead-cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced

external failure cost

costs incurred on defective products after they are shipped to customers

internal failure cost

costs incurred on defective products before they are shipped to customers

Prevention cost

costs incurred to preclude the production of products that do not conform to specifications.

cost tracing

describes the assignment of direct costs to a particular cost object

Target pricing

estimated price for a product or service that potential customers will pay

Cost prediction

forecasts about future costs

finished goods inventory

goods completed but not yet sold

cost-benefit analysis

involves the weighing of the costs associated with a decision against the benefits arising from that decision. The analysis is used to decide whether to proceed with a course of action or not.

Step-Wise Cost

is a cost that does not change steadily with changes in activity volume, but rather at discrete points. The concept is used when making investment decisions and deciding whether to accept additional customer orders. A ___ is a fixed cost within certain boundaries, outside of which it will change is an expense that stays constant over a range of production and changes in lump sums as production volumes increase and decrease.

target costing

is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product.

Manufacturing Overhead

is all of the costs that a factory incurs, other than the variable costs required to build products, such as direct materials and direct labor. This overhead is applied to the units produced within a reporting period. Examples of costs that are included in the manufacturing overhead category are: Depreciation on equipment used in the production process Property taxes on the production facility Rent on the factory building Salaries of maintenance personnel Salaries of manufacturing managers Salaries of the materials management staff Salaries of the quality control staff Supplies not directly associated with products (such as manufacturing forms) Utilities for the factory Wages of building janitorial staff

Period cost (Ex 2 - 6)

is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets. A __ is more closely associated with the passage of time than with a transactional event. Selling expenses Advertising expenses Travel and entertainment expenses Commissions Depreciation expense General and administrative expenses Executive and administrative salaries and benefits Office rent Interest expense (that is not capitalized into a fixed asset)

Direct Labor

is production or services labor that is assigned to a specific product, cost center, or work order. When a business manufactures products, __ is considered to be the labor of the production crew that produces goods, such as machine operators, assembly line operators, painters, and so forth.

cost of goods sold

is the accumulated total of all costs used to create a product or service, which has been sold. These costs fall into the general sub-categories of direct labor, materials, and overhead. In a service business, the cost of goods sold is considered to be the labor, payroll taxes, and benefits of those people who generate billable hours (though the term may be changed to "cost of services"). In a retail or wholesale business, the cost of goods sold is likely to be merchandise that was bought from a manufacturer.

Indirect labor

is the cost of any labor that supports the production process, but which is not directly involved in the active conversion of materials into finished products. Examples of __ positions are: Production supervisor Purchasing staff Materials handling staff Materials management staff Quality control staff

Factory overhead

is the costs incurred during the manufacturing process Production supervisor salaries Quality assurance salaries Materials management salaries Factory rent Factory utilities Factory building insurance Fringe benefits Depreciation Equipment setup costs Equipment maintenance Factory supplies Factory small tools charged to expense Insurance on production facilities and equipment Property taxes on production facilities

Capacity

is the maximum sustainable rate of output that an operation can achieve. The amount of __limits the revenue that a business can generate.

Raw Material Inventory

is the total cost of all component parts currently in stock that have not yet been used in work-in-process or finished goods production.

Job costing

is used to accumulate costs at a small-unit level. For example, __ is appropriate for deriving the cost of constructing a custom machine, designing a software program, constructing a building, or manufacturing a small batch of products.

Manufacturing Statement

is usually split up into four different parts: direct materials, direct labor, overhead, and total manufacturing costs or cost of goods manufactured.

Controlling

monitoring progress toward goal achievement and taking corrective action when needed

full product cost

refers to the assignment of both direct and indirect costs to a product. This means that direct materials, direct labor, and overhead are included in the cost.

Product cost

sum of the costs assigned to a product for a specific purpose

Value Engineering

systematic evaluation of all aspects of the value chain, with the objective of reducing costs and achieving a quality level that satisfies customers

cost estimation

the attempt to measure a past relationship based on data from past costs and the related level of an activity