Management And Accounting Web

Management Accounting Terminology

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Terminology Main Page | MAAW's Textbook Main Page

Cost and Management Accounting Terms Defined with some Examples and Links for more information.

Activity cost
- Cost associated with different types, or levels of activities. Unit level, batch level, product level, customer level and business level. See MAAW's Textbook Chapter 7.

Appraisal Cost - The cost of testing and inspecting both the materials and finished products. See Quality Cost.

Asset - An unexpired cost. An object with expected future benefits. Inventory, book value or undepreciated cost of buildings and equipment.

Average Cost - Usually refers to the mean of a category of costs. The unit cost of a product that flows through a production process.

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. See MAAW's Textbook Chapter 7.

Business (or facility) Level or Sustaining Cost - Cost associated with maintaining the business and facilities. Maintenance, housekeeping, and administrative functions.

By-Products - By-products are a sub-category of joint products that have relatively insignificant sales values as a proportion of the value of the entire group from which they are derived.  Typically none of the joint cost is assigned to the by-products. See Joint Products.

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.

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.

Cost - Sacrifice. The price of any resource.

Cost Accumulation Method - Cost accumulation refers to the manner in which costs are collected and identified with specific customers, jobs, batches, orders, departments and processes. There are four accumulation methods including Job Order, Process, Backflush, and Hybrid methods. See MAAW's Textbook Chapter 2.

Cost Flow Assumption - A cost flow assumption refers to how costs flow through the inventory accounts, not the flow of work or products on a production line. The various types of cost flow assumptions include: Specific identification (e.g., by job), first in, first out, last in, first out and weighted average. MAAW's Textbook Chapter 2.

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.

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. See MAAW's Textbook Chapter 7.

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.

Discretionary Cost - Can be increased or decreased at the discretion of the decision maker. Not committed. Advertising, employee training, research and development, preventive maintenance.

Expense - An expired cost. See above. Cost of goods sold.

Expired Cost - A cost associated with an object who's benefits have been obtained or recorded.An expense such as cost of goods sold.

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.

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.

Flexible Resource- Resources that generate cost in proportion to the amount used. Direct material.

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.

Future Cost - Estimated costs. Budgeted 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.

Incremental Cost - Cost of one more item, unit or customer. Cost of one more passenger on an airline.

Implicit Cost - Unstated and unrecorded cost. Opportunity costs.

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.

Inventory Cost - See Product costs.

Inventory Valuation Mehod - Inventory valuation refers to how product costs are assigned to the inventory. Note that inventory valuation refers to book value, not market value. Inventory valuation methods include throughput costing, direct costing, full absorption costing, and activity base costing. MAAW's Textbook Chapter 2.

Joint Costs - Joint costs refers to the costs associated with producing a group of joint products prior to the point of separation.The cost associated with a hog prior to the time it becomes various products. See MAAW's Chapter 6 Appendix.

Joint Products - Joint products refers to a group of products that are produced simultaneously by a common process. The products obtained from a hog such as the chops, ham, and bacon are joint products.

Lean Company and Lean Enterprise - See the Summary of Concepts and Terms associated with Lean

Life cycle Cost - Cost associated with the various stages of a product's life cycle. (See MAAW's Product Life Cycle topic.)  The life cycle cost of a product include:

1. Development and design.
2. Introduction.
3. Production.
4. Distribution.
5. Post sales service.
6. Product take back.
7. Abandonment.

Long Run - A period where a decision maker can increase or decrease capacity. See short run.

Long Run Cost - These can be flexible or capacity related according to ABKY. Depreciation on plant and equipment.

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.

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.

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.

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.

Period Cost - Cost that are expensed in the period in which incurred. Non-manufacturing costs according to GAAP.

Prevention and Appraisal Cost - Prevention costs include the costs of planning and designing the production process to ensure conformance. See Quality Cost.

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.

Product Level Cost - Cost of an activity that is required or performed to support a specific product.Product engineering. See MAAW's Textbook Chapter 7.

Quality Costs - Cost associated with prevention and appraisal, and internal and external failure of products or services. See the Morse Summary.

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 the ABKY Chatper 6 Summary.

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.

Short Run Cost - ABKY define these as flexible costs. Direct material.

Sunk Cost - Sunk costs are costs that are irrevocable, or unavoidable and therefore not relevant. The amount paid down on a recently acquired machine is a sunk costs and is not relevant to the decision to replace the machine. See the ABKY Chatper 6 Summary.

Unexpired Cost - An asset. Inventory until sold, buildings, equipment.

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. See MAAW's Textbook Chapter 7.

Variable Cost - A cost that changes or varies with changes in the activity level. Direct material.