ICAEW MI key terms

Any item for which costs are separately measured, such as a product, service, department, customer or project. Identifying the cost object first determines which costs are direct and which must be apportioned.

A cost that can be traced to a specific cost object in an economically feasible way, such as raw material in a product or the wages of an assembly worker. It needs no estimation or allocation.

A cost that cannot be traced wholly to one cost object and must instead be apportioned or absorbed, such as factory rent, supervision or machine maintenance. Also called overhead.

A cost that changes in total in direct proportion to activity volume while staying constant per unit, for example direct materials or sales commission. Total variable cost is linear only within the relevant range.

A cost that stays constant in total over a period regardless of activity volume, so cost per unit falls as output rises. Examples include rent, insurance and salaried supervision.

A cost that is fixed within a band of activity but jumps to a new higher or lower level once that band is exceeded, such as adding a second supervisor or machine. Common in capacity decisions.

A cost containing both a fixed element and a variable element, such as a telephone bill with line rental plus call charges, or a salesperson's salary plus commission. Must be split for decision making.

A quick technique for splitting a semi-variable cost into fixed and variable parts by comparing total costs at the highest and lowest activity levels. Variable cost per unit equals the change in cost divided by the change in activity.

The band of activity over which a cost behaviour pattern, such as a constant unit variable cost or a fixed total cost, can reasonably be assumed to hold. Estimates outside it are unreliable.

Sales revenue less variable costs. It measures how much each unit or product line contributes towards covering fixed costs and then generating profit, and underpins marginal costing and break-even analysis.

A costing method that assigns both variable and fixed production overhead to units produced, so inventory is valued at full production cost. Profit then depends on production volume as well as sales.

A costing method that values inventory at variable production cost only, treating fixed production overhead as a period cost. Profit then moves with sales volume, which supports short-term decisions.

The predetermined rate used to charge indirect production costs to output, calculated as budgeted overhead divided by budgeted activity such as labour hours or machine hours. Applied to actual activity to find absorbed overhead.

The difference between overhead actually incurred and overhead absorbed into production using a predetermined rate. Over-absorption means absorbed exceeded incurred; under-absorption means the reverse, usually written off to profit.

The fair sharing of an indirect cost between several cost centres or departments on a suitable basis, such as floor area for rent or number of employees for canteen costs. Precedes reapportionment and absorption.

A costing approach that assigns overhead to products according to the activities they consume, using cost drivers such as number of set-ups or orders. It improves accuracy where products differ in complexity.

A factor that causes a cost to change or that is used to attach overhead to cost objects. Examples include machine hours, production runs, customer orders and inspection hours.

The activity level at which total contribution equals total fixed costs, giving neither profit nor loss. It can be expressed in units, revenue or as a percentage of budgeted capacity.

The amount by which budgeted or actual sales exceed the break-even level, expressed in units, revenue or as a percentage. It shows how far sales can fall before a loss arises.

The study of how changes in volume, selling price, variable cost and fixed cost affect profit, using break-even charts and contribution ratios. It assumes costs behave linearly within the relevant range.

A future incremental cash cost that differs between the alternatives being considered. Past costs, committed costs and apportioned fixed overhead are generally irrelevant to a decision.

The contribution or benefit forgone by using a scarce resource in one way rather than its next best alternative. It is not recorded in the accounts but is essential in decision making.

A cost already incurred and unaffected by any future decision, such as past research spending or the written-down value of existing equipment. It must be excluded from relevant costing.

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

A choice between producing a component in-house and buying it externally, based on relevant costs. It must include avoidable fixed costs, opportunity costs of freed capacity and qualitative factors such as quality and supplier reliability.

Contracting an activity or process to an external provider rather than performing it internally. The decision weighs relevant cost savings against loss of control, quality risk, dependency and hidden transition costs.

A constraint-focused method that treats only direct material as a truly variable cost and measures throughput as sales revenue less material cost. It ranks products by throughput per unit of bottleneck resource.

A system that sets predetermined costs and revenues for products and compares them with actual results. It supports budgeting, pricing, inventory valuation and management by exception through variance analysis.

A predetermined unit cost built from expected material quantities and prices, labour times and rates, and overhead absorption rates. It represents what a unit should cost under efficient operating conditions.

The process of comparing actual results with standard or budgeted figures, calculating the difference and investigating its cause. Favourable and adverse variances are analysed by price, usage, efficiency and expenditure.

A budget restated to the actual activity level achieved, so that comparison with actual cost is like-for-like. It removes volume effects and leaves genuine price and efficiency variances.

A quantified financial plan for a defined future period, expressed in money or units. It coordinates activities, allocates resources and provides the benchmark against which actual performance is controlled.

A budgeting approach in which every activity and cost must be justified afresh from a zero base rather than by adjusting last year's figure. It challenges waste but is time-consuming to apply.

Preparing next period's budget by adjusting the current period's figures for expected changes such as inflation or volume growth. It is quick and stable but can perpetuate past inefficiency.

A control principle in which managers focus attention only on results that deviate significantly from plan, usually identified by variance size or percentage thresholds. It conserves scarce management time.

The use of financial and non-financial indicators to assess whether an organisation, department or manager is achieving its objectives. Measures should be relevant, controllable and linked to strategy.

A divisional performance measure calculated as controllable or divisional profit divided by the investment in assets employed, expressed as a percentage. It encourages asset efficiency but can discourage worthwhile investment.

Divisional profit less a notional interest charge on the assets employed at a required rate of return. Unlike ROI it encourages investment earning above the required rate, but it is an absolute amount.

A performance framework measuring performance across financial, customer, internal process, and learning and growth perspectives. It links operational measures to strategy rather than relying on short-term financial results alone.