Basic Concepts of Cost Accounting PDF

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Summary

This document includes basic concepts of cost accounting provided by Sir Muhammad Bilal Ijaz. These concepts will help in solving problems in the course Cost and Management Accounting....

Description

Terms

Definitions

Administrative costs

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling.

Common cost

A cost that is incurred to support a number of cost objects but that cannot be traced to the individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any one passenger taking the flight.

Conversion costs

Direct labour cost plus manufacturing overhead cost.

Cost behaviour

The way in which a cost reacts to changes in the level of activity

Cost object

Anything for which cost data are desired. Examples of cost objects are products, customers, jobs, and parts of the organization such as departments or divisions.

Cost of goods manufactured

The manufacturing costs associated with the goods that were finished during the period.

Differential cost

A difference in cost between two alternatives. Also see incremental cost.

Differential revenue.

The difference in revenue between two alternatives.

Direct cost

A cost that can be easily and conveniently traced to a specified cost object.

Direct labour

Factory labour costs that can be easily traced to individual units of product. Also called touch labour.

Direct materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

Finished goods

Units of product that have been completed but not yet sold to customers.

Fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unity basis, it varies inversely with the level of activity.

Incremental cost

An increase in cost between two alternatives. Also see differential cost.

Indirect cost

A cost that cannot be easily and conveniently traced to a specified cost object.

Indirect labour

The labour costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

Indirect materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Inventoriable costs Synonym for product costs. Manufacturing overhead

All manufacturing costs except direct materials and direct labour.

Opportunity cost

The potential benefit that is given up when one alternative is selected over another.

Period costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued, typically SG&A expenses. Not product costs.

Prime costs

Direct materials cost plus direct labour cost

Product costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labour, and manufacturing overhead. Also see Inventoriable costs.

Raw materials

Any materials that go into the final product.

Relevant range

The range of activity within which assumption about variable and fixed costs behaviour are valid.

Schedule of cost of goods manufactured

A schedule showing the direct materials, direct labour, and manufacturing overhead costs incurred during a period and the portion of those costs that are assigned to Work in Process and Finished Goods.

Selling costs

All costs that are incurred to secure customer orders and get the finished product or service in the hands of the customer.

Sunk cost

A cost that has already been incurred and that cannot be

changed by any decision made now or in the future. Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.

Work in process

Units of product that are only partially complete...