2009

COST AND MANAGEMENT

ACCOUNTING Glossary
COST AND MANAGEMENT ACCOUNTING 2009
Glossary

ASSIGNMENT

COST AND MANAGEMENT ACCOUNTING

A GLOSSARY OF COSTING TERMS AND COST ING CONCEPTS

DEPEARTMENT OF MANAGEMENT STUDIES

Submitted To

Mr. R Murali

Submitted By:

Deependra Netam 215109030 Pratyoosh Kumar 215109063

Vamshi Krishna 215109050 Chinthala Praveen 215109086

NATIONAL INSTITUTE OF TECHNOLOGY

COST AND MANAGEMENT ACCOUNTING 2009
Glossary

TIRUCHIRAPPALLI

CONFIRMATION LETTER

We the group no 19 have completed the assignment (Glossary of

Costing terms and concepts) and have circulated the assignment to all
the groups by email.

Thanking you

Group 19
COST AND MANAGEMENT ACCOUNTING 2009
Glossary

Glossary

ABC Analysis: Activity based costing ,an inventory method where by firms exercise
different degree of control over different items of inventories depending upon their
cost and rate of moving.

Abnormal cost : It is the cost which is not normally incurred at a given level of
output in the conditions in which that level of output is normally attained.

Absolute cost : It is the total cost of any product or process. For e.g.: in a cost
sheet, both absolute cost and cost per unit are depicted.

Absorption costing : It is the technique of assigning all costs i.e. both fixed and
variable, to the respective product/service.

Actual Cost: An amount determined on the basis of cost incurred including

standard cost properly adjusted for applicable variance.
Administrative cost : It is the indirect cost pertaining to the administrative
function which involves formulation of policies, directing the organisation and
controlling the operations of an undertaking.

Avoidable Cost: A cost associated with an activity that would not be incurred if the
activity were not performed.
Batch costing: This method of costing is used where small parts/components of
the same kind are required to be manufactured in large quantities. Here a batch of
similar products is treated as a job and the cost of such a job is ascertained.

Budgeted cost: Cost or quantitative expression of objectives and a means of

monitoring progress towards achievement of those objectives for a specific period.
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Glossary
Committed cost: It is a fixed cost which results from decisions of prior period and
is not subject to managerial control in the present. Examples of committed cost are
depreciation, insurance premium and rent.

Common Cost: The cost of resources employed jointly in the production of two or
more outputs and the cost cannot be directly traced to any one of those outputs.

Contract costing : If a job is very big and takes a long time for its completion, then
the method appropriate for costing is called contract costing. Here the cost of each
contract is ascertained separately.It is suitable for firms engaged in erection activities
like construction of bridges, roads, buildings, dams etc.

Contribution centres : Profit centres whose expenditure are reported on a

marginal cost basis, are called contribution centres.

Controllable cost : The cost, which can be influenced by the action of a specified
person in an organisation, is known as controllable cost.

Conversion cost : It is the cost incurred for converting the raw material into
finished product. It comprises of direct labour cost, direct expenses and factory
overheads.

Cost: Cost represents the amount of expenditure (actual or notional) incurred on or

attributable to a given thing. It represents the resources that have been or must be
sacrificed to attain a particular objective.

Cost absorption :It is the process of absorbing the overhead costs (indirect costs)
allocated to or apportioned over a particular cost centre.

Cost Accounting Practice: Any disclosed or established accounting method or

technique which is used for measurement of cost, assignment of cost to accounting
periods, and assignment of cost to cost objects.

Cost Driver: Any factor that causes a change in the cost of an activity or output. For
example, the quality of parts received by an activity, or the degree of complexity of
tax returns to be reviewed.
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Glossary
Cost allocation : Cost allocation refers to the allotment of whole items of costs to
cost centres.

Cost apportionment : It is the process of distributing an item of cost over several

cost centres or cost units

Cost Assignment: A process that identifies costs with activities, outputs, or other
cost objects. In a broad sense, costs can be assigned to processes, activities,
organizational divisions, products, and services.

Cost centre: Cost centre is the smallest organisational sub-unit for which separate
cost collection is attempted. It is defined as a location, a person or an item of
equipment (or group of these) for which cost may be ascertained and used for the
purpose of cost control.

Cost unit: A cost unit is defined as a unit of quantity of product, service or time (or
a combination of these) in relation to which costs may be ascertained or expressed.
Cost units are usually units of physical measurement like number, weight, time, area,
length, volume etc.

Differential cost: Difference in the total cost between alternatives calculated to

assist decision making and represents the change in total cost (both fixed and
variable) due to a change in the level of activity, technology, process or method of
production, etc.

Distribution cost : It is the cost of the sequence of operations which begins with
making the packed product available for despatch and ends with making the
reconditioned returned empty package, if any available, for re-use.

Direct cost :Direct cost is that cost which can be identified with a cost centre or a
cost unit. For e.g. cost of direct materials, cost of direct labour.

Direct costing : Under direct costing, a unit cost is assigned only the direct cost,
i.e., all the direct costs are charged to the relevant operations, products or processes.
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Glossary
Direct Labour : Labour which can be attributed wholly to a particular product,
process or job is called direct labour. For eg. labour employed in the crushing
department of an oil mill.

Direct Materials : Materials which are present in the finished product or can be
identified in the finished product are called direct materials. For eg. coconuts in case
of coconut oil or wood in a wooden cupboard.

Direct Expenses : Expenses incurred (except direct materials and direct labour)
specifically for a product, process or job is known as direct expenses. They are also
called "chargeable expenses". For eg. hiring charges for a machine.

Discretionary cost: It is an "escapable" or "avoidable" cost. In other words, it is

that cost which is not essential for the accomplishment of a particular objective.

Decision driven cost: It is that cost which is incurred following a policy decision
and continues to be incurred till that decision is altered. It does not vary with
changes in output or with operational activities.

Economic order quantity: The level of inventory order that minimises total cost
associated with inventory management.

Estimated cost : It is an approximate assessment of what the cost will be. It is

based on past data adjusted to anticipated future changes.

Expired cost: Costs which cannot contribute to the production of future revenues.

FIFO: Method (of process costing) the method of cost assignment that computes an
average cost per equivalent unit of production for the current period; keeps
beginning inventory units and costs separate from current period production and
costs.

Fixed cost : Fixed cost is that cost which remains constant at all levels of
production. For e.g. rent, insurance.
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Glossary
Historical Costing : It is the ascertainment of costs after they have been incurred.
This costing is based on recorded data and the cost arrived at are verifiable by past
events.

Indirect cost : Cost which cannot be identified with a particular cost centre or cost
unit is called indirect costs. For e.g. wages paid to indirect labour.

Indirect Expenses : Expenses incurred other than direct expenses are called
indirect expenses. For eg. factory rent & insurance, power, general repairs.

Indirect Labour : Labour which cannot be identified with a particular product,

process or job is called indirect labour. For eg. maintenance workers.

Indirect Materials : Indirect materials are those materials which do not normally
form part of the finished products or which cannot be directly traced to the finished
product. For eg. stores, oil, grease, cotton wool etc.

Impersonal cost centre : consisting of a location or an item of equipment

Imputed / Notional cost : Imputed cost is that cost which does not involve any
cash outlay. Though it is a hypothetical cost, it is relevant for decision making.
Interest on capital, the payment for which is not actually made, is an example of
imputed cost.

Inventoriable / Product cost : It is the cost which is assigned to the product.

Investment centres :Centres which are responsible for earning an optimum

return on investments are termed as investment centres.

Irrelevant cost: They are not relevant cost and are not affected by management
action.

Job Costing : A job card is prepared for each job to accumulate costs. The cost of
the jobs is determined by adding all the costs against the job when it is completed.

This method of costing is used in printing press, foundries, motor- workshops,

advertising etc.
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Glossary
Joint cost :It is the cost of the process which results in more than one main
product.

Labour efficiency variance: The number of hours actually worked minus the
standard hours allowed for the production achieved multiplied by the standard rate
to establish a value for efficiency (favorable) or inefficiency (unfavorable) of the work
force.

Labor mix variance:I t presents the financial effect associated with changing the
proportionate amount of higher or lower paid workers in production.

=(actual mix *actual hours * standard rate) - (standard mix * actual hours *
standard rate);

Labor rate variance: The actual rate (or actual weighted average rate) paid to
labor for the period minus the standard rate multiplied by all hours actually worked
during the period;

Labor yield variance : It shows the monetary impact of using more or fewer total
hours than the standard allowed

= (standard mix * actual hours * standard rate) -(standard mix * standard

hours * standard rate);

Managed / Policy cost: It is that cost which is incurred as a matter of policy eg: R
& D cost. It arises from periodic (usually annual) decisions regarding the maximum
outlay to be incurred and This cost is not tied to a cause and effect relationship
between input and output.

Marginal cost: It is the amount at any given volume of output by which aggregate
cost changes if the volume of output changes increases/decreases) by one unit.

Marginal Costing: Under marginal costing, marginal cost is ascertained by

differentiating between fixed and variable costs. Marginal costing is of great
importance in case of short-term decision making.
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Glossary
Mixed cost: Costs that are neither perfectly variable nor absolutely fixed in relation
to volume change.

Multiple Costing : It is a combination of two or more methods of costing

mentioned above. Suppose a firm manufactures bicycles, including its components,
the parts will be costed by way of batch costing but the cost of assembling the bicycle
will be done by unit costing. This method is also called composite costing.

Some other industries using this method of costing are those manufacturing –
radios, automobiles, aeroplanes etc.

Normal cost : It is the cost which is normally incurred at a given level of output,
under the conditions in which that level of output is normally attained.

Non-controllable cost: They cannot be directly administered/ acquired at a given

level of management.

Operating Costing : The method of costing used in service rendering undertakings

is known as operating costing.

Opportunity cost: Cost of benefits foregone from rejecting the next best
alternative in favour of the best option available.

Out of pocket cost: These are cost that requires current or future cash
expenditures as a result of a decision.

Overhead : Overhead is the sum total of indirect materials, indirect labour and
indirect expenses. It can be Production / Works overhead, Administrative overhead,
Selling overhead, Distribution overhead.

Period cost : It is the cost which is not assigned to the product but is charged as an
expense against the revenue of the period in which it is incurred.

Personal cost centre : Cost centre consisting of a person or a group of persons

Post-ponable cost : It is that cost which can be shifted to the future with little or
no effect on the efficiency of the current operations.
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Glossary
Pre-determined cost : It is the cost which is computed in advance, before the
production starts, on the basis of specification of all the factors affecting the cost.

Pre-production cost : It is that part of the development cost which is incurred for
the purpose of a trial run, before the commencement of formal production.

Prime cost : Prime cost is the aggregate of direct material cost, direct labour cost
and direct expenses.

Prime cost percentage rate: Estimated overhead divided by the estimated prime
cost. The result is expressed as a percentage.
Process costing: A costing method applied where a product passes through many
separate stages of manufacture. There is a continuous flow of identical products. Eg.
transport companies, chemical industry, soap industry, rubber industry, paints
industry, electricity supply companies, canteens, hospitals etc.
Product cost: Cost assigned to products and services
Production cost: Cost that is incurred in manufacturing goods. It is prime cost
plus absorbed production overhead
Production cost centre: It is a cost centre where both direct and indirect expenses
are incurred for the production e.g. machine shop, milling and turning shop,
assembly shop.

Production volume ratio: Actual production in standard hours divided by

budgeted standard hours. The result is expressed in percentage.
Profit: Sales minus total cost. It is also contribution minus fixed cost. Also referred
as income
Profit centres : Centres, which have the responsibility of generating and
maximising profits , are called profit centres.

Profit on contracts: Also called attributable profit. It is that proportion of the total
currently estimated profit on the contract which is relative to the work done at the
accounting date.
R&D cost : “Research Cost” and “Development cost”are two different types of costs.
Research cost is the cost of researching for new products, methods and applications.
Development cost is the cost of the process which begins with the implementation of
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Glossary
the decision to produce the new product and ends with the commencement of formal
production of that product .

Relevant cost : It is defined as " cost appropriate to a specific management

decision".

Replacement cost : It is the cost of replacement in the current market.

Responsibility centre : When an organisation is divided into different sub-units

according to the responsibility and for each sub-unit, a specified individual is made
responsible, then the sub-unit thus formed is termed as a responsibility centre.

Revenue centres : Centres which are devoted to raising revenue with no

responsibility for production are called revenue centres. Eg. Sales centre.

Semi-variable cost : This cost is partly fixed and partly variable in relation to the
output. For e.g. telephone bill, electricity bill.

Selling cost : Selling cost represents the indirect cost which is incurred for seeking
to create and stimulate demand and securing orders.

Service Cost Centre : A cost centre which renders services to production cost
centres is termed as service cost centre. It serves as an ancillary unit to the
production cost centre. E.g Powerhouse, boiler plant, repair shop.

Shut down cost: The fixed cost which cannot be avoided during the temporary
closure of a plant is known as shut down cost.

Single Output/Unit Costing : This method of costing is used where a single

product is produced. This method of costing is normally used in marble quarrying,
mining, brick-kilns, breweries, etc.

Standard cost : It is a pre-determined cost which is arrived at, assuming a

particular level of efficiency in utilisation of material, labour and other indirect
services. It is the planned cost of a product and is expected to be achieved under a
particular production process under normal conditions.
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Glossary
Standard Costing : CIMA defines standard costing as " a control technique which
compares standard costs and revenues with actual results to obtain variances which
are used to stimulate improved performance."

Sunk cost : Historical cost which is incurred in the past is known as sunk cost. This
cost is not relevant in decision making in the current period.

Unabsorbed cost:

Uncontrollable cost : The cost which cannot be influenced by the action of the
person heading the responsibility centre is called uncontrollable cost. For e.g. all the
allocated costs and the fixed costs.

Unexpired cost: They have the capacity of contributing to the production of the
revenue in the future.

Uniform Costing : It is defined as " the use by several undertakings of the same
costing system, i.e., the same basic costing methods, principles and techniques."

Variable cost : The cost which varies with the level of production is called variable
cost i.e., it increases on increase in production volume and vice-versa. For e.g. cost of
materials, cost of labour.