Key Costs Related to Management and Cost Accounting

Part of Management and Cost Accounting For Dummies (UK Edition)

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

  • Labour: Work needed to make products.

  • Production Overhead: Indirect materials, indirect labour 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.

  • Semi-variable costs: Combination of fixed and variable costs.

  • Contribution: 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: Costs incurred for goods that are part-finished.

  • Finished goods cost: Costs incurred 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.

  • Non-controllable costs: Costs that you can’t change.

  • Conversion costs: Direct labour 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 particular 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 direct and a share of production overheads.

  • Target cost: Cost goal set for engineers designing a product.