Management Accounting Terminology

Terminology Main Page

Term Definition More Specific Definition
 or Example
 Cost Sacrifice The price of any resource.
 Cost object Any segment or element for which cost information is desired. (See the Gordon & Loeb summary for more). A product, service, project, activity, department, division, or customer, etc.
 Direct cost Cost used by a single cost object. (Note that the definition of a cost as direct or indirect changes if the cost object changes. (See the Gordon & Loeb summary for more). A cost that would be eliminated if the cost object is eliminated. A supervisor's salary is a direct cost to the production department he or she is in charge of or managing.
 Indirect cost Cost that is common or shared by more than one cost object. (See the Gordon & Loeb summary for more). A production supervisor's salary is an indirect cost to the products produced within his or her department. 
 Flexible resource Resources that generate cost in proportion to the amount used. Direct material.
 Flexible cost Cost of flexible resources. Always direct costs. Cost that vary in proportion to the amount used. Direct material costs, i.e., cost of materials or components that go into or become the product.
Capacity related resource Resources purchased in advance. Committed resources.  Resources that generate cost based on the amount acquired rather than the amount used. Buildings and equipment.
 Capacity related cost Cost that are based on the amount acquired rather than the amount used.  Can be direct or indirect, but are fixed in the short run. Depreciation on buildings and equipment.
 Variable cost A cost that changes or varies with changes in the activity level. Direct material.
 Fixed cost A cost that does not change or vary with changes in the activity level.  Capacity related cost. Straight line depreciation, a supervisor's salary, property taxes.
 Matching concept The idea of bringing cost and benefits together on the income statement  in the same time period. Accrual accounting where benefits (revenues) are matched with the costs (expenses) associated with generating the benefits.
 Expired cost A cost associated with an object who's benefits have been obtained or recorded. An expense such as cost of goods sold.
 Unexpired cost An asset. Inventory until sold, buildings, equipment.
 Expense An expired cost. See above. Cost of goods sold.
 Asset An unexpired cost. An object with expected future benefits. Inventory, book value or undepreciated cost of buildings and equipment.
 Product cost Costs associated with producing a product that are capitalized in the inventory, i.e., become assets until the products are sold. Direct manufacturing costs such as direct materials and direct labor, as well as indirect manufacturing costs usually referred to as factory overhead.
 Inventory cost Product costs. See above. See cell above.
 Inventory valuation The product costs assigned to the inventory. Note that inventory valuation refers to book value, not market value.  See inventory valuation methods.
 Manufacturing cost Cost associated with the production of products. Factory costs. These are unexpired costs (assets) until the products are sold, then are charged off as expense, i.e., cost of goods sold  Includes direct material, direct labor (direct manufacturing costs) and indirect manufacturing costs also referred to as factory overhead and factory burden.
 Non-manufacturing cost Cost not associated with the production of products, but with some other function such as administration or distribution. Treated as period costs by GAAP. Distribution, selling, marketing, customer service, research and development.
 Period cost Cost that are expensed in the period in which incurred. Non-manufacturing costs according to GAAP. See above.
 Incremental cost Cost of one more item, unit or customer. Cost of one more passenger on an airline.
 Full cost Direct plus indirect cost. Variable plus a share of the fixed costs. GAAP product costs is considered full costs although this is misleading because it does not include non-manufacturing costs.
Historical cost Recorded costs. Sometimes referred to as actual cost, but this is misleading because the cost recorded depends on the accounting alternative chosen. Any costs that are recorded such as labor costs, materials costs, depreciation etc. For example, accounting alternatives for depreciation include straight line and several accelerated methods.
 Future cost Estimated costs. Budgeted costs.
 Average cost Usually refers to the mean of a category of costs. The unit cost of a product that flows through a production process.
 Implicit cost Unstated and unrecorded cost. Opportunity costs.
 Opportunity cost Benefit foregone by not accepting or pursuing the next best alternative. The income or interest on an alternative investment. The opportunity cost of owning anything is what you could have obtained with the money.
 Short run ABKY define this as the time period where a decision maker cannot adjust capacity. Usually thought of as a year in accounting, but this is just a ball park number and depends on the type of resource involved. The short run for an inter-state highway, or factory building is longer than a year and for a resource like fork lift trucks, it would be much shorter than a year.
 Long run The opposite of the above where capacity can be increased or decreased. See the cell above.
 Short run cost ABKY define these as flexible costs. Direct material. 
 Long run cost These can be flexible or capacity related according to ABKY. Depreciation on plant and equipment.
 Discretionary cost Can be increased or decreased at the discretion of the decision maker. Not committed. Advertising, employee training, research & development, preventive maintenance.
 Business level or sustaining
 cost
Capacity related cost. Buildings and equipment.
 Activity cost Cost associated with different types, or levels of activities. Unit level, batch level, product level, customer level and business level.
 Unit level cost Cost of an activity that is required or performed each time a unit of product or service is produced or provided. Direct material required for a unit of product.
 Batch level cost Cost of an activity that is required or performed each time a batch of products or services is produced. Setting up the production line to produce a batch of product X. Also inspecting the batch, moving the batch etc. 
 Product level cost Cost of an activity that is required or performed to support a specific product. Product engineering.
 Customer level cost Cost of an activity that is required or performed to support a specific customer. Sales calls, installation of a product and technical support.
 Business (or facility) level
 cost
Cost associated with maintaining the business and facilities. Maintenance, housekeeping, and administrative functions.
 Relevant cost Cost that will be different when two or more alternatives are involved. Also called differential cost. The cost that will be different if a product is dropped. See note below related to the example on pages 93-96. 
 Life cycle cost Cost associated with the various stages of a product's life cycle. (See MAAW's Product Life Cycle topic. Cost of product:
   1. Development and design.
   2. Introduction.
   3. Production.
   4. Distribution.
   5. Post sales service.
   6. Product take back.
   7. Abandonment.