ICAG Paper 1.4 Cost & Management Accounting key terms

Any item, activity, product, customer or department for which costs are separately measured. It defines the boundary of the cost collection exercise and determines which costs are relevant to the analysis being performed.

A cost that can be traced to a specific cost object in an economically feasible way, such as raw material in a product or a worker's wages on a specific job.

A cost that cannot be traced economically to a specific cost object and must therefore be apportioned or absorbed, such as factory rent, supervision salaries or machine depreciation.

The sum of direct material, direct labour and direct expense for a cost unit. It excludes all production overhead and is the first subtotal in a traditional cost statement.

The total of direct labour plus production overhead incurred to convert raw materials into finished goods. It is used where material cost is a small or separately controlled element.

A production or service location, function, activity or item of equipment for which costs are accumulated and against which they can be controlled by a responsible manager.

The fair division of an indirect cost among several cost centres on a logical basis, such as floor area for rent or machine hours for power, before those costs are absorbed into products.

The assignment of an entire indirect cost to a single cost centre where the whole amount is attributable to that centre, for example a department's own supervisor's salary.

A predetermined rate, usually per labour hour, machine hour or as a percentage of direct labour cost, used to charge production overhead into cost units during a period.

The amount by which overhead charged into production using a predetermined rate exceeds the overhead actually incurred. It is written off or credited to the costing profit and loss account at period end.

The shortfall arising when overhead absorbed into production using a predetermined rate is less than the overhead actually incurred for the period, increasing the cost of sales.

The situation where two or more service cost centres provide services to each other as well as to production departments, so their costs must be reapportioned by repeated distribution or algebraic methods.

A costing method applied where each cost unit is a separately identifiable, customer-specific job, so costs are collected against a unique job number and profit is measured job by job.

A costing method for identical or near-identical units produced in groups, where the batch is the cost unit and unit cost equals total batch cost divided by the number of good units in the batch.

A form of job costing used for large, long-duration, site-based projects, recognising revenue and profit by reference to the stage of completion and using work certified and retention money.

The value of work completed on a contract and approved by the client's architect or engineer, which establishes the amount the contractor may invoice at that stage.

A percentage of certified contract value withheld by the client until the contract is completed or a defects liability period expires, protecting the client against faulty work.

The proportion of total contract work finished at a reporting date, commonly measured by cost incurred to date over total estimated cost, used to recognise revenue and profit.

The unavoidable, expected loss of input in a process, which carries no scrap value in the cost of good output and is absorbed by the units that remain.

Loss in a process that exceeds the normal level and is therefore treated as an unexpected cost, valued at full cost and written off to the profit and loss account.

The excess of good output over the expected level after allowing for normal loss, valued at full cost and credited in the profit and loss account as a reduction in cost.

A measure converting partly finished work into the number of complete units it represents, enabling consistent costing of opening and closing work in progress in a process.

A costing approach in which only variable production costs are charged to units, with fixed costs treated as period costs. It highlights contribution and supports short-term decisions.

A costing approach in which both variable and fixed production costs are charged to units, so inventory carries a share of fixed overhead and profit varies with production volume.

Sales revenue less all variable costs. It measures the amount each unit or product line contributes towards covering fixed costs and then generating profit.

The level of activity at which total contribution equals total fixed costs and profit is zero, expressible in units, revenue or as a percentage of capacity.

The amount by which budgeted or actual sales exceed break-even sales, indicating how far sales may fall before a loss arises. It may be expressed in units, revenue or percentage.

The study of how changes in volume, selling price, variable cost and fixed cost affect profit, often using break-even charts and contribution-based calculations to support planning decisions.

A future, incremental cash flow that differs between the alternatives being considered. Costs that are sunk, committed or unavoidable are excluded from the decision.

The contribution or benefit forgone by using a scarce resource in one way rather than its next best alternative. It is included in relevant costing even though no cash is paid.

A cost already incurred, or a commitment made in the past, that cannot be changed by any current decision and is therefore irrelevant to it.

The scarce resource, such as a machine, skilled labour or material, that restricts output. Ranking products by contribution per unit of the limiting factor maximises total contribution.

A predetermined estimate of the cost of a unit, built from expected quantities and prices for materials, labour and overhead, used as a benchmark for control and valuation.

The process of comparing actual performance with standard or budgeted performance, breaking the difference into causes such as price, usage, rate and efficiency, and reporting them for management action.

A budget restated for the actual level of activity achieved, so that fixed and variable costs are compared with actuals on a like-for-like basis for meaningful variance analysis.

The process of setting budgets, communicating them, measuring actual performance against them and taking corrective action where significant variances arise.

A system that assigns revenues and costs to the managers accountable for them, so that performance is judged only on items within that manager's control.

A cost that a specific manager can influence or authorise within a given period, and which is therefore fair to include in that manager's performance report.

A divisional performance measure calculated as divisional operating profit divided by divisional invested capital, showing profit generated per unit of capital employed.

Divisional profit less a notional interest charge on the division's invested capital. Unlike return on investment it encourages managers to accept projects earning above the cost of capital.