Key Costs Related to Managerial Accounting

Part of the Managerial Accounting For Dummies Cheat Sheet

In accounting, a cost measures how much you pay/sacrifice for something. Managerial accounting must give managers accurate cost information relevant to their management decisions. Here are several cost-related terms you encounter in managerial accounting:

Direct cost: Cost that you can trace to a specific product
Indirect cost: Cost that you can't easily trace to a specific product
Materials: Physical things you need to make products
Labor: Work needed to make products
Overhead: Indirect materials, indirect labor, and other miscellaneous costs needed to make products
Variable costs: Costs that change in direct proportion with activity level
Fixed costs: Costs that don't change with activity level
Mixed costs: Combination of fixed and variable costs
Contribution margin: Sales less variable costs
Product costs: Costs needed to make goods; considered part of inventory until sold
Period costs: Costs not needed to make goods; recorded as expenses when incurred
Work-in-process cost: How much you paid for goods that are started but not yet completed
Finished goods cost: How much you paid for goods completed but not yet sold
Cost of goods manufactured: The cost of the goods completed during a period
Cost of goods sold: The cost of making goods that you sold
Controllable costs: Costs that you can change
Noncontrollable costs: Costs that you can't change
Conversion costs: Direct labor and overhead
Incremental costs: Costs that change depending on which alternative you choose; also known as relevant costs and marginal costs
Irrelevant costs: Costs that don't change depending on which alternative you choose
Opportunity costs: Costs of income lost because you chose a different alternative
Sunk costs: Costs you've already paid or committed to paying
Historical cost: How much you originally paid for something
Cost per unit: Cost of a single unit of product
Expense: Costs deducted from revenues on the income statement
Cost driver: Factor thought to affect costs
Process cost: Cost of similar goods made in large quantities on an assembly line
Job order cost: Cost of a batch of specially made goods
Absorption cost: Cost that includes fixed and variable product costs
Target cost: Cost goal set for engineers designing a product