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
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
Cost - Sacrifice. The price of any resource.
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
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
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
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
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
Incremental Cost - Cost of one more item, unit
or customer. Cost of one more passenger on
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
Inventory Cost - See Product costs.
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.
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
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
Quality Costs - Cost associated with prevention and
appraisal, and internal and external failure of products or services. See
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,
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
Variable Cost - A cost that changes or varies
with changes in the activity level. Direct material.