Fundamental of Terminologies Flashcards
(94 cards)
1
Q
Cost
A
Cost refers to the monetary value of resources consumed or forgone to achieve a specific objective, such as production, distribution, or service delivery.
2
Q
Costing
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Costing is the technique and process of determining the cost of performing a specific activity, producing a product, or rendering a service.
3
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Cost Accounting
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Cost accounting is a branch of accounting that deals with the collection, classification, analysis, and control of costs. It helps in cost control, decision-making, and performance evaluation.
4
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Cost Accountancy
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Cost accountancy refers to the application of cost accounting principles, methods, and techniques to the science, art, and practice of cost control and profitability analysis.
5
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Fixed Cost
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Fixed costs are those that remain constant irrespective of the level of production or activity, such as rent, insurance, and salaries.
6
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Variable Cost
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Variable costs vary directly and proportionally with the level of activity or production, e.g., raw materials, direct labor.
7
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Semi - variable Cost
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Semi-variable costs have both fixed and variable components. They remain fixed up to a certain level, then vary, e.g., telephone bills.
8
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Direct cost
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Costs that can be directly traced to a specific cost unit like product or service, e.g., direct material, direct labor.
9
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Indirect Cost
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Costs that cannot be directly traced to a specific product and are incurred for the benefit of multiple cost units, e.g., factory rent, supervisor salary.
10
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Elements of Cost
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Direct Labour, Direct Material, Direct Expense, indirect material, indirect labour, indirect expenses
11
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Direct Material
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Raw materials directly used in the production of goods that can be easily identified with the product.
12
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Direct labour
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Wages paid to workers who are directly involved in the production process.
13
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Direct expenses
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Expenses directly attributable to a specific job or process, such as special tools or design costs.
14
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Indirect Material
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Materials that are used in the production process but not directly traceable to the product, e.g., lubricants, cleaning supplies.
15
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Indirect labour
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Wages paid to employees not directly involved in production, e.g., supervisors, maintenance staff.
16
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Indirect expenses
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General expenses such as factory lighting, depreciation, rent — not directly tied to a product.
17
Q
Prime cost
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The total of all direct costs, i.e., Direct Material + Direct Labor + Direct Expenses.
18
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Factory Cost / Works Cost
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Prime Cost + Factory Overheads (indirect production costs).
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A
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Cost of Production
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Works Cost + Administration Overheads related to production.
21
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Cost of Sales
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Cost of Production + Selling and Distribution Overheads.
22
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Total Cost
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The sum of all costs incurred in production and selling — also called the full cost.
23
Q
Standard Costing
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A technique where predetermined costs are compared with actual costs to identify variances and improve efficiency.
24
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Variance Analysis
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The process of analyzing the difference between standard cost and actual cost and finding reasons for deviation.
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Budgetary Control
A system where budgets are prepared and actual performance is compared regularly for control and planning.
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Job Costing
Used when production is done against specific orders. Each job is treated as a cost unit.
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Batch Costing
Used when products are manufactured in batches. Costs are collected per batch and averaged.
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Process Costing
Suitable for industries with continuous production, where costs are accumulated for each process.
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Contract Costing
Used in construction and long-term contracts. Each contract is treated as a cost unit.
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Operating Costing / service costing
Used in service sectors like transport, hospitals, where cost per service unit is calculated.
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Absorption Costing
A costing method where both fixed and variable costs are absorbed into the cost of production. Used for external financial reporting.
32
Activity-Based Costing (ABC)
A modern costing method where overheads are allocated based on activities that drive costs, improving accuracy of cost allocation.
33
Break-Even Analysis
Technique used to determine the point at which total revenue equals total cost, i.e., no profit or loss.
34
CVP analysis
An analytical tool to understand the relationship between cost, volume, and profit at different levels of activity.
35
Shut Down Point
The level of activity below which a firm should shut down operations temporarily because variable cost is not being recovered.
36
Make or Buy Decision
A cost comparison technique to decide whether to manufacture in-house or purchase externally.
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Costing methods vs Costing techniques
Costing methods refer to how costs are accumulated and ascertained for products or services. Costing techniques refer to how costs are analyzed or used for decision-making.
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Costing Methods
1 Job Costing Products are made per specific customer order (e.g., furniture, printing)
2 Batch Costing Goods are produced in batches (e.g., pharmaceuticals, bakery items).
3 Process Costing Production is continuous, and products pass through processes (e.g., textiles, chemicals).
4 Operation Costing Similar to process costing, but more detailed — used in auto parts, assembly lines.
5 Contract Costing Long-term construction projects (e.g., roads, buildings, bridges).
6 Single/Unit Costing When a single product is produced (e.g., brick factory, cement plant).
7 Departmental Costing Cost is computed department-wise (e.g., multiple production departments).
8 Operating/Service Costing For service industries (e.g., transport, hospitals, hotels, power plants).
9 Multiple Costing Combination of methods (e.g., automobile industry uses job + process costing).
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Costing techniques
1 Marginal Costing Focus on variable costs for short-term decision-making.
2 Absorption Costing Allocates both fixed and variable costs to products (used in financial reporting).
3 Standard Costing Compares actual costs with standard costs to analyze variances.
4 Budgetary Control Uses budgets to monitor performance and control costs.
5 Uniform Costing Standardized costing system used by firms in the same industry.
6 Historical Costing Records and uses actual costs incurred in the past.
7 Activity-Based Costing (ABC) Allocates overheads based on activities and cost drivers — increases accuracy.
8 Life-Cycle Costing Considers all costs from product design to disposal.
9 Target Costing Sets cost targets based on competitive market prices and desired profit.
10 Kaizen Costing Focuses on continuous cost reduction during production.
11 Throughput Costing Considers only direct material cost as variable; all others are fixed.
40
Cost Centre
A cost centre is a location, person, or department within an organization to which costs are assigned for control and analysis.
👉 Example: Production department, maintenance unit.
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Cost Unit
A cost unit is a unit of product, service, or activity in relation to which costs are measured.
👉 Example: Per tonne (cement), per km (transport), per patient (hospital).
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Overhead
Overheads are indirect costs that cannot be directly traced to a single cost unit. It includes indirect material, labor, and expenses.
👉 Types: Factory overhead, administrative overhead, selling & distribution overhead.
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Idle time
Idle time refers to the time when workers are paid but not engaged in productive work due to machine breakdown, power failure, etc.
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Spoilage
Spoilage refers to materials or products that are damaged or rejected and cannot be rectified or sold as regular output.
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Wastage
Wastage is the portion of material lost during processing which cannot be recovered or reused.
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Scrap
Scrap refers to residual material left over after production, which may have some recoverable value.
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Cost Allocation
Allocation is the charging of full cost items to a single cost centre or unit (used when the expense is directly related).
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Cost Apportionment
Apportionment is the distribution of a cost item over multiple cost centres using a rational basis.
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Cost absorption
Cost absorption is the process of charging overheads to individual units of product or services.
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Sunk Cost
Sunk cost is a past cost that cannot be recovered and should not affect future decisions.
👉 Example: Machinery bought last year.
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Opportunity Cost
The cost of the next best alternative foregone when a decision is made.
👉 Example: Choosing to produce in-house vs. earning rental income by leasing the factory.
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Relevance Cost
Costs that are affected by a specific managerial decision in the future.
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Differential Cost
The difference in cost between two alternative decisions or levels of activity.
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Imputed Cost / Notional Cost
Costs that do not involve actual cash outlay but are considered for decision-making, e.g., notional rent for owned building.
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Controllable Cost
Costs that can be influenced or controlled by a specific level of management.
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Uncontrollable Cost
Costs that cannot be regulated by a specific manager or department.
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Conversion Cost
The sum of direct labor and manufacturing overhead incurred to convert raw material into finished goods.
👉 Formula: Direct Labor + Manufacturing Overheads
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Shutdown Cost
Costs that continue to be incurred even when a plant is temporarily closed.
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Replacement Cost
The cost that would be incurred to replace an asset at current market prices.
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Estimated Cost
The expected cost of manufacturing a product, based on assumptions or past experience.
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Standard Cost
Predetermined cost of manufacturing under normal operating conditions; used in variance analysis.
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Budgeted Cost
Cost based on estimated expenditure as per the prepared budget.
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Abnormal Cost
Costs that are unusual, unexpected, and not part of regular business operations.
👉 Example: Fire loss.
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Normal Cost
The cost that is normally incurred under normal operating conditions.
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Cost Behaviour
Refers to how cost changes in response to changes in activity level.
Fixed Costs: Do not change with volume (e.g., rent).
Variable Costs: Change proportionally with volume (e.g., raw materials).
Semi-variable Costs: Have both fixed and variable components (e.g., electricity).
🔍 Conceptual Use: Essential in break-even analysis, budgeting, and decision-making.
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Cost Object
Anything for which a separate measurement of cost is required.
👉 Examples: A product, service, customer, project, or department.
🔍 Helps in Activity-Based Costing and strategic cost management.
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Incremental Cost
The additional cost incurred if one more unit is produced or a new project is accepted.
🔍 Used in: Special order decisions, new product pricing, expansion analysis.
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Marginal Cost
The change in total cost resulting from producing one additional unit.
🔍 Used in: Pricing under competition, accepting export orders, shut-down decisions.
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Capacity Costs
Costs associated with the capacity to produce — usually fixed in the short term.
Idle Capacity Cost: Cost of unused capacity.
Effective Capacity: Maximum output considering routine delays and maintenance.
🔍 Important in service costing, transport costing, plant efficiency analysis.
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Responsibility Accounting
A system where different segments or responsibility centers of an organization are assigned costs and revenues.
Types: Cost Centre, Revenue Centre, Profit Centre, Investment Centre.
🔍 Helps management to evaluate performance of departments or managers.
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Uniform Costing
A standardized costing system used across companies in the same industry for benchmarking and comparison.
🔍 Useful for industry-level collaboration, trade associations, and cost audits.
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Life Cycle Costing
Considers the total cost of a product over its entire life — from design to disposal.
🔍 Used in strategic decisions like product pricing, R&D, and sustainability analysis.
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Target Costing
A pricing approach where cost is controlled by setting a target cost = market price - desired profit.
🔍 Used in competitive markets where price is customer-driven.
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Kaizen Costing
Continuous cost reduction strategy during the manufacturing phase through small, incremental improvements.
🔍 Focuses on employee suggestions, waste elimination, and lean manufacturing.
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Value Analysis / Value Engineering
A technique to improve the value of a product by either improving its function or reducing its cost without compromising quality.
🔍 Used before the product is finalized — part of cost management.
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Cost Audit
Verification of cost accounts and compliance with cost accounting standards, usually done under law in regulated industries.
🔍 Ensures transparency, cost control, and compliance with statutory norms.
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Transfer Pricing
Pricing of goods or services exchanged between departments or divisions of the same company.
🔍 Critical in multi-division/multinational firms to evaluate performance and for tax compliance.
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Throughput Accounting
A modern technique focusing only on truly variable costs (usually direct material). It aims to maximize throughput (sales – material cost).
🔍 Used in bottleneck situations and Theory of Constraints.
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Cost Pool and Cost Driver (ABC)
Cost Pool: Group of individual costs associated with a particular activity.
Cost Driver: The factor that causes a change in the cost of an activity.
🔍 Core to Activity-Based Costing (ABC), provides better cost accuracy.
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Zero-Based Budgeting (ZBB)
Every expense must be justified from scratch rather than referring to past budgets.
🔍 Useful in tight cost control environments like government or NGOs.
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Absorption vs. Variable Costing
Absorption Costing includes all costs (fixed + variable) in product cost.
Variable (Marginal) Costing includes only variable costs; fixed costs treated as period cost.
🔍 Impacts inventory valuation and profit reporting.
82
Break-Even Point (BEP)
The level of sales at which total revenue equals total cost — no profit, no loss.
🔍 Formula: Fixed Costs ÷ Contribution per Unit
🔍 Critical for pricing, risk evaluation, and expansion planning.
83
Profit-Volume Ratio (P/V Ratio)
Indicates the contribution margin as a percentage of sales.
👉 Formula: Contribution ÷ Sales × 100
🔍 Higher P/V ratio means better profitability.
84
Contribution Margin
The difference between sales and variable cost. Shows how much contributes toward fixed costs and profit.
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Flexible Budgeting
A budget that adjusts according to different levels of activity or capacity utilization.
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Fixed Budgeting
A static budget prepared for only one level of activity and doesn't change with output.
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Activity-Based Costing (ABC)
A technique that assigns overheads to products based on actual activities and their cost drivers.
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Backflush Costing
A simplified costing technique used in Just-in-Time (JIT) systems where costing is done at the end of the process, not at every stage.
89
Joint Cost
Costs incurred up to the split-off point in a process that yields multiple products (e.g., crude oil to petrol, diesel, LPG).
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By-Product & Joint Product
Joint Products: Two or more products with nearly equal economic value derived from a common process.
By-Product: Secondary products of relatively lower value.
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Normal Loss vs Abnormal Loss
Normal Loss: Expected and unavoidable loss in production.
Abnormal Loss: Unexpected loss due to carelessness or accident.
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Key Factor / Limiting Factor Analysis
Identifying the resource (like machine hours, raw material, labor) that restricts output.
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Cost Control vs Cost Reduction
Cost Control: Keeping costs within budget using pre-set norms.
Cost Reduction: Achieving permanent reduction in unit cost without reducing quality.
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Environmental Costing
Captures the cost of environmental impact — waste treatment, regulatory compliance, etc.
