AAT Level 2 Principles of Costing key terms

The amount of money an organisation spends, or the value of the resources it uses, to produce goods or provide services, recorded in money terms.

The process of grouping costs into categories that share a common feature, such as direct or indirect, fixed or variable, so that they can be recorded and analysed usefully.

A cost that can be identified clearly and wholly with a particular cost unit or cost centre, such as the raw materials used to make one product.

A cost that cannot be traced directly to a particular cost unit or cost centre and so must be shared out, such as factory rent or supervisor salaries.

The total of indirect costs incurred in running an organisation, such as rent, heating, depreciation and indirect labour, which must be shared across cost units or cost centres.

A cost that stays the same in total over a range of activity, regardless of how many units are made, such as annual rent or insurance.

A cost that changes in total in direct proportion to the level of activity, such as raw materials, while the cost per unit stays constant.

A cost that has both a fixed and a variable element, so part stays the same and part changes with activity, such as a utility bill with a standing charge.

A part of an organisation, such as a department, machine or location, for which costs are collected and recorded separately so that responsibility can be assigned.

A single unit of product or service for which costs are calculated, such as one chair, one batch of cakes or one repair job.

An original record providing evidence of a transaction, such as an invoice, goods received note or clock card, from which cost data is entered into the accounting system.

The approach an organisation uses to build up the cost of its output, chosen to suit how it produces goods or services, such as job, batch or process costing.

A method where costs are collected separately for each individual job or customer order, used when products are made to order and are distinct from one another.

A method where costs are collected for a group of identical items produced together, and the cost per unit is found by dividing the batch cost by the number of units.

A method used where identical products pass through a series of continuous processes, with costs collected by process and averaged over the units produced.

A method that includes all production costs, both direct costs and production overhead, in the cost of a unit, with overhead absorbed using a suitable basis.

The process of charging a whole cost directly to the cost centre that caused it, where no sharing between centres is needed, such as a department's own supervisor salary.

The process of sharing out a cost between two or more cost centres on a fair basis, such as dividing rent between departments by floor area.

The process of transferring the costs of service cost centres to production cost centres so that all overheads end up in the cost of production.

The rate used to charge production overhead into the cost of units, calculated by dividing total overhead by a chosen measure of activity such as labour hours.

The measure of activity used to spread overhead across units, such as direct labour hours, machine hours or direct labour cost, chosen because it reflects how overhead is incurred.

When the overhead charged to production using a predetermined rate is more than the overhead actually incurred, so too much cost has been included in unit costs.

When the overhead charged to production using a predetermined rate is less than the overhead actually incurred, so unit costs have not included enough overhead.

The cost of the raw materials and components used in making a product or providing a service, including purchase price and costs of bringing materials in.

A reduction in the list price given by a supplier to a customer, usually because of the trade they are in, deducted before the invoice total is calculated.

The process of putting a money value on inventory held, usually at the lower of cost and net realisable value, using a method such as FIFO or average cost.

First in, first out: a stock valuation method that assumes the oldest items are used or sold first, so closing stock is valued at the most recent prices.

Average cost: a stock valuation method that recalculates a weighted average unit cost each time new items are received, then values issues at that average.

The total amount an employee earns in a period before any deductions are taken, including basic pay, overtime and bonuses.

The amount an employee actually receives after income tax, national insurance and other deductions have been taken from gross pay.

Paid time when an employee is available for work but cannot produce because of machine breakdowns, lack of materials or similar reasons, usually treated as overhead.

The extra amount paid above the normal hourly rate for overtime hours, often treated as production overhead rather than a direct labour cost.

The cost of employees' time that can be identified directly with making a product or providing a service, such as machine operators' wages.

The cost of employees' time that supports production but cannot be traced to a particular unit, such as supervisors, storekeepers and maintenance staff.

The total of direct materials, direct labour and direct expenses for a cost unit, before any overhead is added.

The real cost incurred, taken from invoices, wage records and expense receipts, rather than an estimate or budgeted figure.

The planned cost for a period or activity, set in advance and used as a benchmark against which actual costs are compared.

The difference between a budgeted or standard figure and the actual figure, which may be favourable or adverse and is used to highlight where costs need attention.

A document that presents cost information to managers, often comparing actual costs with budget and showing variances by cost centre or cost unit.

The sum of all costs incurred in producing output or providing a service, including direct materials, direct labour and overheads.