Glossary of Cost Accounting Terms

From Wikicpa

Contents: Top - 0–9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

• Abnormal spoilage: Spoilage that is not expected from normal operations. The cost of abnormal spoilage is treated as a loss in the period incurred.
• Absorption costing: A product costing procedure where all costs necessary to manufacture the product are assigned to the product. This includes fixed manufacturing overhead costs.
• Accelerated depreciation: A method of depreciation in which larger amounts of depreciation expense are reported in the earlier part of the asset life and smaller amounts are reported in the later years of the asset life. The two most common methods are sum of the years’ digits and double declining balance.
• Activity base: A measure of production volume used to relate manufacturing overhead to the product. Common activity bases are material dollars, direct labor dollars, direct labor hours, and machine hours.
• Actual overhead: All manufacturing costs necessary for the production of products except for direct materials and direct labor.
• Annual volume: The expected production activity for the coming year. Annual volume smoothes out the seasonal fluctuations in overhead cost and production volume.

B

• Benefit-cost ratio: A measure of whether a capital expenditure will return more or less than the minimum required rate of return.
• Breakeven point: The volume of sales where total revenue is equal to total expense and profit is therefore zero. Sales volume may be measured in units or dollars.
• Budget variance: The difference between the actual manufacturing overh costs and the flexible budgeted overhead costs for the standard direct labor ho allowed. The budget variance can be separated into a spending variance and efficiency variance.
• By-products: Outputs from a manufacturing process whose market value at the separation point does not add significantly to the total market value of all outputs from the process.

C

• Coefficient of variation: A measure of relative dispersion used to compare the variability of two different alternatives.
• Contribution margin: The difference between total sales and total variable costs. It represents the dollars available to cover the fixed expenses, what remains after fixed expenses represents net income.
• Contribution margin ratio: The ratio of the contribution margin to the sales revenue. It represents the percentage of each sales dollar that is available to cover fixed expenses and then profits.
• Conversion costs: The sum of the direct labor and manufacturing overhead costs.
• Cost: Resources consumed to accomplish a specific objective.
• Cost-volume-profit analysis: The analysis of the relationship between selling price, variable expense, fixed expense, volume, and profits. The relationship may be expressed mathematically or graphically.

D

• Direct costing: A product costing procedure where only the variable manufacturing costs are assigned to the product.
• Direct labor cost: The cost of all important labor that is physically and economically traceable to a single. product
• Direct materials cost: The cost of all important materials used in production that are physically and economically traceable to a single product.

E

• Efficiency variance: The difference between the flexible budgeted overhead costs for the actual direct labor hours and the flexible budgeted overhead costs for the standard direct labor hours allowed. This variance represents a measure, in dollars, of how much variable overhead can be expected to increase or decrease as direct labor is used less or more efficiently.
• Equivalent finished units: A measure of the production in a given period which converts the physical number of units worked on to a measure of the amount of effort expended during the period.

F

• Finished goods: The amount in the general ledger used to record the cost of completed jobs.
• First-in, first-out (FIFO) cost: A cost flow assumption used in process costing where units in the beginning work in process are assumed to be the first units completed.
• Flexible budget: A budget that relates total mixed cost to an activity base and provides the way of calculating a budgeted cost for different levels of activity within a relevant range.

G

H

• High-low analysis of cost: A procedure for developing a cost estimate where the straight estimating line is drawn on a graph connecting two widely separated cost observations (often the highest and lowest cost).

I

• Internal rate of return: That rate which when used in a present value computation

results in a zero net present value for the project.

J

• Joint cost: A cost whose incurrence necessarily benefits more than one cost object.
• Joint products: Outputs from a manufacturing process whose market value at the separation point adds significantly to the total market value of all outputs from the process.

K

L

• Learning curve: An exponential function that describes the decrease in the average production time per unit as the cumulative production volume increases.
• Leaning rate: The rate of change in the cumulative average time per unit as the number of units produced doubles.
• Linear programming: A mathematical technique used to totni ulate and solve problems which have an objective and some constraints which can be expressed as linear equations.

M

• Manufacturing overhead: All production costs necessary for the production of the product other than direct materials and direct labor.
• Mixed cost: A cost that contains both a fixed and variable component.

N

• Net present value: A measure of whether a capital expenditure will return more or less than the minimum required rate of return.
• Net realizable value: A costing procedure that assigns the sales price less any separable costs to the by-product at the split-off point.
• Normal spoilage Spoilage: that is expected to result from normal operations. The cost of normal spoilage is assigned to the units that have passed the location where the spoilage is identified.

O

P

• Partially completed units: Production units that are not completed at the end of the accounting period. These units are converted to equivalent finished units for unit cost calculations.
• Period cost: A cost that is recognized as an expense in the period it expires.
• Postoptimality analysis: An analysis of the simplex solution of a linear program to determine how the solution changes with changes in the coefficients of the objective function and the amount of each constraint.
• Practical Volume: The maximum production activity that can be attained, giving consideration to uncontrollable equipment breakdowns, delays in material delivery and other uncontrolable factors.
• Present value: The present value amount is that amount which will be received at the end of the waiting period minus the return that could have been earned on the present value during the period.
• Present value of annuity: Present value of periodic payments of a fixed amount paid at regular time intervals.
• Prime cost: The sum of direct materials and direct labor costs.
• Probability: A number between zero and one representing the likelihood of a specific event occurring.
• Product cost: A cost necessary to obtain or product a product. It is recognized as an expense in the period the product is sold.

Q

R

• Reciprocal allocation: A method for allocating service department overhead to producing departments that recognizes the service provided by one service department to the other.
• Regression analysis: The process of fitting a line to a set of historical data to minimize the sum of the squared differences between the line and the data.
• Risk:The characteristic of an investment that the actual future cash flows may vary from the amounts predicted for the investment.

S

• Salvage value: The amount of cash which can be received for an asset when the firm no longer desires to continue using that asset.
• Separable cost: The costs incurred to complete the manufacture and sale of a joint product after the split-off point. The manufacturing costs are collected using job order or process costing procedures and assigned to the individual products.
• Scrap: Residual materials such as metal shavings or wood chips. The disposal value of scrap is credited to the actual manufacturing overhead account.
• Simplex method: A method for solving linear programs by moving from one extreme point to another until an optimal solution is found. (It is nonnally done by computer).
• Standard deviation: A measure of the dispersion of the data around the mean. It can be interpreted as a measure of the inherent uncertainty in a decision situation.
• Step cost: A cost that is fixed for a short interval of activity, changes abruptly, and then remains fixed for another short range of activity.
• Spending variance: The difference between the actual manufacturing overhead cost and the flexible budgeted overhead cost for the actual direct labor hours. This variance measures both the impact of price changes for the overhead items included in the flexible budget and any savings or wastage in the usage of the items.

T

• Target profits: The level of profits desired by management for a given time period. Target profits is expressed as an absolute amount but may be calculated as a percentage of sales, or a percentage of investment.

V

• Variable cost: A cost whose total changes in direct proportions to changes in activity.
• Variance: The difference between a budgeted result and an actual result.

W

• Work in process: The account in the general ledger used to record the manufacturing costs incurred for the production of jobs. When a job is completed its cost is removed from work in process and charged to the finished goods account.