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Cost Accounting Common Terms and Definitions

This page contains essential cost accounting terms and definitions. Terms and definitions related to standard cost specifically and variance, are also included.

  • Cost accounting – An area of accounting that involves measuring, recording, and reporting product costs.
  • Cost accounting system – Manufacturing cost accounts that are fully integrated into the general ledger of a company.
  • Cost behavior analysis – The study of how specific costs respond to changes in the level of business activity.
  • Fixed costs – Costs that remain the same in total regardless of changes in the activity level.
  • Variable costs Costs – that vary in total directly and proportionately with changes in the activity level.
  • Mixed costs – Costs that contain both a variable and a fixed cost element and change in total but not proportionately with changes in the activity level.
  • Activity-based costing – A cost accounting system that focuses on the activities performed in manufacturing a specific product.
  • Job cost sheet – A form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job.
  • Job order cost system – A cost accounting system in which costs are assigned to each job or batch.
  • Process cost system – A system of accounting used when a large quantity of similar products are manufactured.
  • Absorption costing – A costing approach in which all manufacturing costs are charged to the product.
  • Variable costing – A costing approach in which only variable manufacturing costs are product costs, and fixed manufacturing costs are period costs (expenses).
  • Materials requisition slip – A document authorizing the issuance of raw materials from the storeroom to production.
  • Overapplied overhead – A situation in which overhead assigned to work in process is greater than the overhead incurred.
  • Predetermined overhead rate – A rate based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base.
  • Summary entry – A journal entry that summarizes the totals from multiple transactions.
  • Time ticket – A document that indicates the employee, the hours worked, the account and job to be charged, and the total labor cost.
  • Underapplied overhead – A situation in which overhead assigned to work in process is less than the overhead incurred.
  • Conversion costs – The sum of labor costs and overhead costs.
  • Cost driver – Any factor or activity that has a direct cause–effect relationship with the resources consumed.
  • Cost reconciliation schedule – A schedule that shows that the total costs accounted for equal the total costs to be accounted for.
  • Equivalent units of production – A measure of the work done during the period, expressed in fully completed units.
  • Just-in-time processing – A processing system dedicated to producing the right products (or parts) as they are needed.
  • Operations costing – A combination of a process cost and a job order cost system, in which products are manufactured primarily by standardized methods, with some customization.
  • Physical units – Actual units to be accounted for during a period, irrespective of any work performed.
  • Process cost systems – An accounting system used to apply costs to similar products that are mass-produced in a continuous fashion.
  • Production cost report – An internal report for management that shows both production quantity and cost data for a production department.
  • Total units (costs) accounted for – The sum of the units (costs) transferred out during the period plus the units (costs) in process at the end of the period.
  • Total units (costs) to be accounted for – The sum of the units (costs) started (or transferred) into production during the period plus the units (costs) in process at the beginning of the period.
  • Unit production costs – Costs expressed in terms of equivalent units of production.
  • Weighted-average method – Method used to compute equivalent units of production which considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process.
  • Activity index – The activity that causes changes in the behavior of costs.
  • Relevant range – The range of the activity index over which the company expects to operate during the year.
  • Break-even point – The level of activity at which total revenues equal total costs.
  • Contribution margin ratio – The percentage of each dollar of sales that is available to apply to fixed costs and contribute to net income; calculated as contribution margin per unit divided by unit selling price.
  • Contribution margin (CM) – The amount of revenue remaining after deducting variable costs.
  • Contribution margin per unit – The amount of revenue remaining per unit after deducting variable costs; calculated as unit selling price minus unit variable cost.
  • Cost-volume-profit (CVP) analysis – The study of the effects of changes in costs and volume on a company’s profits.
  • Cost-volume-profit (CVP) graph – A graph showing the relationship between costs, volume, and profits.
  • Cost-volume-profit (CVP) income statement – A statement for internal use that classifies costs as fixed or variable and reports contribution margin in the body of the statement.
  • High-low method – A mathematical method that uses the total costs incurred at the high and low levels of activity to classify mixed costs into fixed and variable components.
  • Margin of safety – The difference between actual or expected sales and sales at the break-even point.
  • Target net income – The income objective set by management.

 

Standard Cost-Variance Terms and Definitions

  • Standard costs – Predetermined unit costs which companies use as measures of performance.
  • Standard cost accounting system – A double-entry system of accounting in which standard costs are used in making entries and variances are recognized in the accounts.
  • Normal standards – Standards based on an efficient level of performance that are attainable under expected operating conditions.
  • Direct labor price standard – The rate per hour that should be incurred for direct labor.
  • Direct labor quantity standard – The time that should be required to make one unit of product.
  • Direct materials price standard – The cost per unit of direct materials that should be incurred.
  • Direct materials quantity standard – The quantity of direct materials that should be used per unit of finished goods.
  • Materials price variance – The difference between the actual quantity times the actual price and the actual quantity times the standard price for materials.
  • Materials quantity variance – The difference between the actual quantity times the standard price and the standard quantity times the standard price for materials.
  • Labor price variance – The difference between the actual hours times the actual rate and the actual hours times the standard rate for labor.
  • Labor quantity variance – The difference between actual hours times the standard rate and standard hours times the standard rate for labor.
  • Overhead controllable variance – The difference between actual overhead incurred and overhead budgeted for the standard hours allowed.
  • Overhead volume variance – The difference between normal capacity hours and standard hours allowed times the fixed overhead rate.
  • Balanced scorecard – An approach that incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals.
  • Customer perspective – A viewpoint employed in the balanced scorecard to evaluate the company from the perspective of those people who buy and use its products or services.
  • Financial perspective – A viewpoint employed in the balanced scorecard to evaluate a company’s performance using financial measures.
  • Ideal standards – Standards based on the optimum level of performance under perfect operating conditions.
  • Internal process perspective – A viewpoint employed in the balanced scorecard to evaluate the effectiveness and efficiency of a company’s value chain, including product development, production, delivery, and after-sale service.
  • Learning and growth perspective – A viewpoint employed in the balanced scorecard to evaluate how well a company develops and retains its employees.
  • Normal capacity – The average activity output that a company should experience over the long run.
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