Cost Accounting Glossary: Key Terms & Concepts

Posted on May 4, 2024 in Economy

Chapter 16: Process Costing Terminology

Key Terms

  • Conversion Costs per Equivalent Unit: The combined costs of direct labor and factory overhead per equivalent unit.
  • Cost of Goods Manufactured: Total manufacturing costs (direct materials, direct labor, and factory overhead) for the period plus beginning goods in process less ending goods in process; also called net cost of goods manufactured and cost of goods completed.
  • First-In, First-Out (FIFO): Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.
  • Job Order Cost Accounting System: Cost accounting system to determine the cost of producing each job or job lot.
  • Materials Consumption Report: Document that summarizes the materials a department uses during a reporting period; replaces materials requisitions.
  • Process Cost Accounting System: System of assigning direct materials, direct labor, and overhead to specific processes; total costs associated with each process are then divided by the number of units passing through that process to determine the cost per equivalent unit.
  • Process Cost Summary: Report of costs charged to a department, its equivalent units of production achieved, and the costs assigned to its output.
  • Process Operations: Processing of products in a continuous (sequential) flow of steps; also called process manufacturing or process production.

Chapter 17: Activity-Based Costing (ABC) Terminology

Key Terms

  • Activity: An event that causes the consumption of overhead resources in an entity.
  • Activity-Based Costing (ABC): Cost allocation method that focuses on activities performed; traces costs to activities and then assigns them to cost objects.
  • Activity-Based Management: An outgrowth of ABC that draws on the link between activities and cost incurrence for better management.
  • Activity Cost Driver: Variable that causes an activity’s cost to go up or down; a causal factor.
  • Activity Cost Pool: Temporary account that accumulates costs a company incurs to support an activity.
  • Activity Overhead (Pool) Rate: Reduces the number of cost assignments required.
  • Batch Level Activities: Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in a batch; the amount of resources used depends on the number of batches run rather than on the number of units in the batch.
  • Cost Object: Product, process, department, or customer to which costs are assigned.
  • Costs of Quality: Costs resulting from manufacturing defective products or providing services that do not meet customer expectations.
  • Facility Level Activities: Activities that relate to overall production and cannot be traced to specific products; cost associated with these activities pertain to a plant’s general manufacturing process.
  • Lean Accounting: System designed to eliminate waste in the accounting process and better reflect the benefits of lean manufacturing techniques.
  • Product Level Activities: Activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run.
  • Unit Level Activities: Activities that arise as a result of the total volume of goods and services that are produced, and that are performed each time a unit is produced.
  • Value-Added Activities: Activities that add to the value of a product or service.

Chapter 18: Cost-Volume-Profit (CVP) Analysis Terminology

Key Terms

  • Absorption Costing: Costing method that assigns both variable and fixed costs to products.
  • Break-Even Point: Output level at which sales equals fixed plus variable costs; where income equals zero.
  • Composite Unit: Generic unit consisting of a specific number of units of each product; unit comprised in proportion to the expected sales mix of its products.
  • Contribution Margin per Unit: Amount that the sale of one unit contributes toward recovering fixed costs and earning profit; defined as sales price per unit minus variable expense per unit.
  • Contribution Margin Ratio: Product’s contribution margin divided by its sale price.
  • Cost-Volume-Profit (CVP) Analysis: Planning method that includes predicting the volume of activity, the costs incurred, sales earned, and profits received.
  • Cost-Volume-Profit (CVP) Chart: Graphic representation of cost-volume-profit relations.
  • Curvilinear Cost: Cost that changes with volume but not at a constant rate.
  • Degree of Operating Leverage (DOL): Ratio of contribution margin divided by pretax income; used to assess the effect on income of changes in sales.
  • Estimated Line of Cost Behavior: Line drawn on a graph to visually fit the relation between cost and sales.
  • High-Low Method: Procedure that yields an estimated line of cost behavior by graphically connecting costs associated with the highest and lowest sales volume.
  • Margin of Safety: Excess of expected sales over the level of break-even sales.
  • Mixed Cost: Cost that behaves like a combination of fixed and variable costs.
  • Operating Leverage: Extent, or relative size, of fixed costs in the total cost structure.
  • Relevant Range of Operations: Company’s normal operating range; excludes extremely high and low volumes not likely to occur.
  • Sales Mix: Ratio of sales volumes for the various products sold by a company.
  • Scatter Diagram: Graph used to display data about past cost behavior and sales as points on a diagram.
  • Step-Wise Cost: Cost that remains fixed over limited ranges of volumes but changes by a lump sum when volume changes occur outside these limited ranges.
  • Variable Costing Income Statement: An income statement in which costs are classified as variable or fixed; also called contribution margin income statement.