What is a Joint Cost?

A joint cost is an expenditure that benefits more than one product, and for which it is not
possible to separate the contribution to each product. The accountant needs to determine a
consistent method for allocating joint costs to products.

What is Variable Cost?

A variable cost is a cost that varies in relation to either production volume or the amount of
services provided. If no production or services are provided, then there should be no variable
costs. If production or services are increasing, then variable costs should also increase.

What are Indirect Materials?

Indirect materials are materials used in the production process, but which cannot be linked to a
specific product or job. Alternatively, they may be used in such insubstantial quantities on a per -
product basis that it is not worthwhile to track them as direct materials (which involves including
them in the bill of materials). Thus, they are consumed as part of the production process, but are
not integrated in substantial amounts into a product or job. Examples of indirect materials are
cleaning supplies, disposable safety equipment, disposable tools, fittings and fasteners, glue, oil,
and tape.

What is a Subsidiary Company?

A subsidiary company is a business entity that is controlled by another organization through
ownership of a majority of its common stock. If the owning entity has acquired 100% of the
shares of a subsidiary, the subsidiary is referred to as a wholly-owned subsidiary.

Standard Cost?

Used to determine the total direct material cost of the product.

Spoilage

is waste or scrap arising from the production process. The term is most commonly applied to raw
materials that have a short life span, such as food used in the hospitality industry. Normal spoilage
is the standard amount of waste or scrap that is caused by production, and which is difficult to
avoid. Abnormal spoilage exceeds the normal or expected rate of spoilage. For example, an
overcooked meal cannot be served to a customer, and so is instead classified as abnormal spoilage.

What is Scrap?
Scrap is the excess unusable material that is left over after a product has been manufactured.
This residual amount has minimal value, and is usually sold off for its material content. A
business can reduce the amount of scrap that it generates by exercising great care in setting up
production equipment, buying raw materials of adequate quality, and training employees in the
proper use of production equipment.

What is Job Costing?

Job costing involves the accumulation of the costs of materials, labor, and overhead for a specific
job. This approach is an excellent tool for tracing specific costs to individual jobs and examining
them to see if the costs can be reduced in later jobs. An alternative use is to see if any excess
costs incurred can be billed to a customer. Job costing is used to accumulate costs at a small -unit
level. For example, job costing is appropriate for deriving the cost of constructing a custom
machine, designing a software program, constructing a building, or manufacturing a small batch
of products.

What is Process Costing?

Process costing is used when there is mass production of similar products, where the costs
associated with individual units of output cannot be differentiated from each other. In other
words, the cost of each product produced is assumed to be the same as the cost of every other
product. Under this concept, costs are accumulated over a fixed period of time, summarized, and
then allocated to all of the units produced during that period of time on a consistent basis. When
products are instead being manufactured on an individual basis, job costing is used to
accumulate costs and assign the costs to products. When a production process contains some
mass manufacturing and some customized elements, then a hybrid costing system is used.

What are Conversion Costs?

Conversion costs are those production costs required to convert raw materials into completed
products. The concept is used in cost accounting to derive the value of ending inventory, which is
then reported in the balance sheet. It can also be used to determine the incremental cost of
creating a product, which could be useful for price setting purposes. Thus, the component costs
and conversion costs of a product, when combined, represent the lower threshold price at which
a product should be sold, so that the producer at least earns back the costs associated with the
product.

What is Indirect Labor?

Indirect labor is the cost of any labor that supports the production process, but which is not
directly involved in the active conversion of materials into finished products. Examples of indirect
labor positions are the production supervisor, purchasing staff, materials handling staff,
materials management staff, and quality control staff. The cost of these types of indirect labor
are charged to factory overhead, and from there to the units of production manufactured during
the reporting period. This means that the cost of indirect labor related to the production process
ends up in either ending inventory or the cost of goods sold.

Overhead

is those costs required to run a business, but which cannot be directly attributed to any specific
business activity, product, or service. Thus, overhead costs do not directly lead to the generation
of profits. Overhead is still necessary, since it provides critical support for the generation of profit-
making activities. For example, a high-end clothier must pay a substantial amount for rent (a type
of overhead) in order to be located in an adequate facility for the sale of clothes. The clothier
must pay overhead to create the proper retail environment for its customers. Examples of
overhead are accounting and legal expenses, administrative salaries, depreciation, insurance,
licenses and government fees, property taxes, rent, and utilities.

What is Sales Tax?

A sales tax is a tax imposed on retail goods and services at the point of sale. The tax is collected by
the entity selling the product or service to a third party, and is remitted to the applicable
government entity at regular intervals. A business is required to collect sales tax when it has nexus
within the taxing region. This has historically meant that the firm has a physical presence in the
region, perhaps because of a facility, or because an employee lives there. The nexus concept has
recently been expanded by a Supreme Court ruling to also include any region into which a
business sells goods or services, such as through a website store.

What is Social Security?

Social Security is a US federal government program that provides social insurance and benefits to
people with inadequate or no income, or who are retired from the workforce. The original Social
Security Act was signed into law in 1935 by President Franklin D. Roosevelt. The law has undergone
several modifications over the years to include several social welfare and social insurance programs.

What is FUTA Tax?

FUTA is an abbreviation for Federal Unemployment Tax Act. FUTA Tax is a United States federal tax
imposed on employers to help fund unemployment payments. The tax is imposed solely on employers
who pay wages to employees.

GAAP

A commonly recognized set of rules and procedures governing corporate accounting and financial
reporting

What is Freight In?

Freight in is the transportation cost associated with the delivery of goods from a supplier to the
receiving entity. For accounting purposes, the recipient adds this cost to the cost of the received
goods

What is Freight Out?

Freight out is the transportation cost associated with the delivery of goods from a supplier to its
customers. This cost should be charged to expense as incurred and recorded within the cost of
goods sold classification on the income statement. Freight out is not an operating expense, since
the supplier only incurs this cost when it sells goods to a customer (rather than incurring it as
part of day-to-day company operating activities).

What is a Commission?

A commission is a fee paid to a salesperson in exchange for services in facilitating or completing a

sale transaction. The commission may be structured as a flat fee, or as a percentage of the
revenue, gross margin, or profit generated by the sale.

A distribution channel

represents a chain of businesses or intermediaries through which the final buyer purchases a good or
service. Distribution channels include wholesalers, retailers, distributors, and the Internet. In a direct
distribution channel, the manufacturer sells directly to the consumer.

Fixed indirect costs

include expenses such as rent; variable indirect costs include fluctuating expenses such as electricity
and gas. For-profit businesses also generally treat “fringe benefits,” including paid time off and the
use of a company car, as indirect costs.

What is Manufacturing Overhead?

Manufacturing overhead is all indirect costs incurred during the production process. This
overhead is applied to the units produced within a reporting period. Examples of costs that are
included in the manufacturing overhead category are as follows:

⚫ Depreciation on equipment used in the production process

⚫ Property taxes on the production facility
⚫ Rent on the factory building
⚫ Salaries of maintenance personnel
⚫ Salaries of manufacturing managers
⚫ Salaries of the materials management staff
⚫ Salaries of the quality control staff
⚫ Supplies not directly associated with products (such as manufacturing forms)
⚫ Utilities for the factory
⚫ Wages of building janitorial staff

Since direct materials and direct labor are usually considered to be the only costs that directly
apply to a unit of production, manufacturing overhead is (by default) all of the indirect costs of a
factory.
Manufacturing overhead does not include any of the selling or administrative functions of a
business. Thus, the costs of such items as corporate salaries, audit and legal fees, and bad debts
are not included in manufacturing overhead.

What is Administrative Overhead?

Administrative overhead is those costs not involved in the development or production of goods
or services. This is essentially all overhead that is not included in manufacturing overhead.
Examples of administrative overhead costs are the costs of:

⚫ Front office and sales salaries, wages, and commissions

⚫ Office supplies
⚫ Outside legal and audit fees
⚫ Administration and sales office lease
⚫ Administration and sales utilities
⚫ Administration and sales telephones
⚫ Administration and sales travel and entertainment

Administrative overhead is considered a period cost; that is, the benefit of this type of cost does
not carry forward into future periods.

Manufacturing overhead
is the cost of everything a company needs to make a product that is not linked directly to any specific
product. For example, the rent a company pays for its factory is an overhead cost because it applies to
the whole factory, not just one product.

Difference Between Direct Cost vs Indirect Cost

Businesses incur costs while generating revenue. If we look at the cost sheet of the company, we will
see that total cost is a combination of direct cost vs indirect cost. These costs are very important for
running any kind of business.

A direct cost is attributable to a specific product or service. For example, the cost of raw materials
utilized in manufacturing a product represents a direct cost. An indirect cost, on the other hand, is a
cost that cannot be directly attributed to a single cost objective but rather is identified with two or
more final cost objectives or intermediate cost objectives.

In this Direct cost vs Indirect Cost article, we will try to understand the comparative analysis between
direct cost vs indirect cost

Difference Between Turnover vs Profit

The Turnover is indicative of the growth prospects of a business, whereas profits, in addition
to the growth prospects, also give an impression of how the management controls different
costs.

Billable hours
are the hours spent working on client projects. Non-billable hours are any that are spent on
administrative or overhead projects that are not directly related to client service.

The Break-Even Point

The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at
which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has
"broken even", though opportunity costs have been paid and capital has received the risk-adjusted,
expected return. In short, all costs that must be paid are paid, and there is neither profit nor
loss.[1][2] The break-even analysis was developed by Karl Bücher and Johann Friedrich Schär.
What is Cost Structure?
Cost structure refers to the types and relative proportions of fixed costs and variable costs that a
business incurs. The concept can be defined in smaller units, such as by product, service, product
line, customer, division, or geographic region. Cost structure is used as a tool to determine prices,
if you are using a cost-based pricing strategy, as well as to highlight areas in which costs might
potentially be reduced or at least subjected to better control. Thus, the cost structure concept is
a management accounting concept; it has no applicability to financial accounting.

What is Factory Overhead?

Factory overhead is the costs incurred during the manufacturing process, not including the costs
of direct labor and direct materials. Factory overhead is normally aggregated into cost pools and
allocated to units produced during the period. It is charged to expense when the produced units
are later sold as finished goods or written off. The allocation of factory overhead to units
produced is avoided under the direct costing methodology, but is mandated under absorption
costing. The allocation of factory overhead is required when producing financial statements under
the dictates of the major accounting frameworks.

What is the Cost of Goods Sold?

Cost of goods sold is the total of all costs used to create a product or service, which has been
sold. These costs fall into the general sub-categories of direct labor, direct materials, and
overhead. Direct labor and direct materials are variable costs, while overhead is comprised of
fixed costs (such as utilities, rent, and supervisory salaries). In a service business, the cost of
goods sold is considered to be the labor, payroll taxes, and benefits of those people who
generate billable hours (though the term may be changed to "cost of services"). In a retail or
wholesale business, the cost of goods sold is likely to be merchandise that was bought from a
manufacturer. It does not include any general, selling, or administrative costs of running a
business.

Definition of Manufacturing Overhead

Manufacturing overhead (also known as factory overhead, factory burden, production overhead)
involves a company's manufacturing operations. It includes the costs incurred in the manufacturing
 facilities other than the costs of direct materials and direct labor. Hence, manufacturing overhead is
referred to as an indirect cost.

Generally accepted accounting principles require that a manufacturer's inventory and the cost of
goods sold shall consist of:

• the cost of direct materials

• the cost of direct labor
• the cost of manufacturing overhead
•
Note: Expenses that are outside of the manufacturing facilities, such as selling, general and
administrative expenses, are not product costs and are not inventoriable. They are reported as
expenses on the income statement in the accounting period in which they occur.

Examples of Manufacturing Overhead

Some examples of manufacturing overhead costs include the following:

• depreciation, rent and property taxes on the manufacturing facilities

• depreciation on the manufacturing equipment
• managers and supervisors in the manufacturing facilities
• repairs and maintenance employees in the manufacturing facilities
• electricity and gas used in the manufacturing facilities
• indirect factory supplies, and much more
Because manufacturing overhead is an indirect cost, accountants are faced with the task
of assigning or allocating overhead costs to each of the units produced. This is a challenging task
because there may be no direct relationship. For example, the property taxes and insurance on the
manufacturing buildings are based on the assets' value and not on the number of units manufactured.
Yet these and other indirect costs must be allocated to the units manufactured.

The ending Inventory formula calculates the value of goods available for sale at the end of
the accounting period. Usually, it is recorded on the balance sheet at a lower cost or its
market value.

Ending Inventory = Beginning Inventory + Purchases -Cost of Goods Sold (COGS)

What is a Short Term Asset?

A short term asset is an asset that is to be sold, converted to cash, or liquidated to pay for
liabilities within one year. In the rare cases where the operating cycle of a business is longer
than one year (such as in the lumber industry), the applicable period is the operating cycle of
the business, rather than one year.

What is Merchandise Inventory?

Merchandise inventory is goods that have been acquired by a distributor, wholesaler, or
retailer from suppliers, with the intent of selling the goods to third parties.