CMA Inter Paper 8: Cost Accounting key terms

Any item, activity, product, service, customer, or project for which costs are separately measured and accumulated. It defines the boundary of the costing exercise and determines what gets costed.

A quantitative measure of the product or service being costed, such as a tonne, litre, machine hour, or passenger-kilometre. It allows costs to be expressed on a comparable per-unit basis.

A location, person, or item of equipment for which costs are separately collected and used for cost control. Centres are classified as production or service centres for overhead apportionment.

The process of setting standards, comparing actual performance against them, and taking corrective action to keep expenditure within planned limits. It focuses on adherence to predetermined targets rather than on changing them.

The achievement of permanent, real reductions in unit cost through improved design, methods, or processes without impairing suitability or quality. It is a continuous, target-based exercise distinct from merely meeting a budget.

Expenditure that can be identified wholly and conveniently with a specific cost unit or cost object. Direct materials, direct labour, and direct expenses together form prime cost.

The total of direct material, direct labour, and direct expenses incurred on a product or job. It is the first element of cost and excludes all production overheads.

A predetermined rate used to charge indirect costs to cost units, calculated by dividing budgeted overhead by a budgeted absorption base such as labour hours, machine hours, or direct wages.

The direct assignment of an entire item of cost to the specific cost centre that caused it, where the whole amount is identifiable. No splitting or estimation is involved in allocation.

The distribution of an indirect cost among several cost centres on an equitable basis, such as floor area for rent or machine value for depreciation. It applies where a cost cannot be wholly allocated to one centre.

The redistribution of service department costs between departments that serve each other, using repeated distribution, simultaneous equations, or the trial-and-error method. It avoids ignoring mutual services when charging overheads to production centres.

A department that supports production, such as maintenance, stores, or power house, and whose costs are ultimately apportioned to production centres. It does not directly produce the saleable output.

The shortfall that arises when overhead actually incurred exceeds the overhead absorbed into production at predetermined rates. It is treated as a debit to costing profit and loss or redistributed using supplementary rates.

An absorption rate computed by dividing the total overhead attributable to a machine, including depreciation, power, and maintenance, by the machine hours expected to be worked. It suits capital-intensive production.

The order size at which the combined annual cost of ordering and holding inventory is minimised. It balances rising holding costs against falling ordering costs as order quantity increases.

The inventory level at which a fresh purchase order is placed, set to cover consumption during the lead time plus a safety margin. It triggers replenishment before stock reaches the danger point.

The upper limit on stockholding, fixed to prevent over-investment and storage problems. It is calculated from reorder level plus reorder quantity, adjusted for minimum consumption and minimum lead time.

The buffer stock below which holdings should not normally fall, providing protection against abnormal consumption or delayed delivery. It is set from reorder level less normal consumption during normal lead time.

The proportion of the workforce replaced during a period, commonly computed as replacements divided by average number of workers. It signals morale, recruitment, and training cost problems.

Time paid for but not worked, caused by machine breakdowns, material shortages, or industrial disputes. Normal idle time is treated as overhead; abnormal idle time is charged to costing profit and loss.

The extra amount paid above the normal wage rate for hours worked beyond standard hours. It is normally treated as overhead unless worked at a customer's specific request.

A method in which costs are accumulated separately for each identifiable job or batch, usually against a customer order. It suits customised, non-standard work such as printing, repairs, and construction contracts.

A form of job costing applied to long-term, site-based contracts where costs are collected against each contract and revenue is recognised by reference to work certified. It uses retention money and a work-in-progress account.

The difference between the value of work certified plus work uncertified and the cost incurred to date on a contract. It is not the final profit and is apportioned conservatively to the profit and loss account.

A portion of each certified payment withheld by the contractee until completion or a defects liability period ends. It protects the client and is shown as a receivable rather than as a reduction of contract revenue.

A costing method where a group of identical units produced together is treated as a single cost unit, and the batch cost is divided by the number of units. It suits component manufacture and pharmaceuticals.

A method used where homogeneous output passes through continuous or repetitive processes, with costs collected by process and averaged over equivalent units. It handles normal loss, abnormal loss, and work in progress.

A notional measure converting partly completed work in progress into the number of fully completed units it represents. It allows costs incurred in a period to be spread fairly between completed output and closing work in progress.

The unavoidable, expected wastage inherent in a process, whose scrap value is credited to the process account. Its cost is absorbed by the good output rather than treated as a separate loss.

The excess of actual output over expected output after allowing for normal loss, valued at the normal cost per good unit. It is credited to the process account and transferred to the abnormal gain account.

Loss arising from unexpected causes such as accidents, machine failure, or substandard input, over and above normal loss. It is valued at normal cost and written off to costing profit and loss.

A system that sets predetermined costs for materials, labour, and overheads, then compares actual results with those standards to report variances. It supports control by exception and performance measurement.

The decomposition of the difference between standard and actual cost into its causes, such as price and usage components. It identifies responsibility and guides corrective management action.

The difference between standard price and actual price of materials purchased, multiplied by the actual quantity. It measures purchasing performance and is usually the responsibility of the purchase manager.

The difference between standard quantity allowed for actual output and actual quantity used, valued at standard price. It measures production efficiency and is normally the production manager's responsibility.

A technique in which only variable costs are charged to cost units and fixed costs are written off against contribution for the period. It underpins break-even analysis and short-term decisions.

Sales revenue less variable costs, representing the amount available to cover fixed costs and then generate profit. It is the key measure in marginal costing for ranking products and deciding on special orders.

The level of sales at which total revenue equals total cost and neither profit nor loss arises. It is computed as fixed cost divided by contribution per unit, or fixed cost divided by the profit-volume ratio.

The excess of actual or budgeted sales over break-even sales, expressed in value or units. It indicates how far sales can fall before a loss is incurred and reflects business risk.

The ratio of contribution to sales, showing the portion of each rupee of sales available to cover fixed costs and profit. It is used to compute break-even sales and to compare product profitability.

The difference in total cost between two alternative courses of action, used to decide between them. Only costs that change between alternatives are relevant to the decision.

A future, incremental cash cost that differs between alternatives and is therefore useful for decision making. Sunk costs and committed fixed costs are excluded because they cannot be changed.

The benefit forgone by using a scarce resource in one way rather than in its next best alternative use. It is a relevant cost for decisions even though no cash outflow is recorded.

A costing system that assigns overheads to products based on the activities they consume, using cost drivers rather than a single volume-based rate. It improves accuracy where products differ in complexity and batch size.

A factor that causes the cost of an activity to change, such as number of set-ups, purchase orders, or inspections. It is the basis for tracing activity costs to products in activity-based costing.

A technique that sets an allowable cost by deducting the desired profit margin from a competitive market price, then designs the product to meet that cost. It works backwards from price rather than forwards from cost.

The accumulation of all costs over a product's entire life, from design and development through manufacture to distribution, use, and disposal. It highlights that most costs are committed early in design.

A systematic study of the function of a product or component to reduce cost without reducing the value it delivers to the customer. It supports cost reduction by examining function versus cost.

A production and purchasing philosophy in which materials arrive only as needed for production, minimising inventory and its carrying costs. It demands reliable suppliers, short set-up times, and high quality.

The cost of holding inventory, including storage, insurance, obsolescence, and the opportunity cost of capital tied up. It rises with order size and is traded off against ordering cost in the EOQ model.

A method in which both variable and fixed production overheads are charged to cost units, so inventory carries a share of fixed cost. It is required for external financial reporting under normal accounting rules.

A cost unit expressed as a combination of two measures, such as passenger-kilometre or tonne-kilometre, used in transport and service industries. It captures both volume and distance in one unit.

Prime cost plus factory or works overheads, representing the total cost of production before administration and selling costs are added. It is also called factory cost or production cost.