Cost Accounting Terminology

Cost

• Cost is a measurement, in money

terms, of the amount of
resources used for the purpose
of production of goods or
rendering of services.
 Cost Centre/ Cost Pool
• A unit of cost accounting selected with a
view to accumulating all the costs under
that unit.

• It may be a division, department, group of

plants, machinery, group of employees
etc.
 Cost Object
• Product, service, program, event or a
responsibility centre to which costs are
assigned.

 Producing a particular unit of product

 Serving a particular customer
 Particular Project
 Particular Event
 Particular Program
 Cost Unit
• Cost Unit is a quantitative unit of the cost
object in relation to which cost are
ascertained.

• Product per unit / per kg/ per MT

• Power per MV
• Transport per passenger per km
Cost Accumulation and Allocation

CC1
OC1

C
O CC2
S
T OC2

S CC3

Cost Centers Cost Objects

Classification of Costs
According to Elements/ Nature of
Expenses
By Relation to Cost Centers
 Direct and Indirect Costs
• If a cost can be allocated to a cost centre
or cost object in economically feasible
way, it is called a direct cost.

• Otherwise , a indirect cost, or Overheads.

 Direct Material
Materials that are consumed in the
manufacturing process and physically
incorporated in the finished product
• Materials whose cost is sufficiently large to
justify the record keeping expenses
necessary to trace the costs to individual
products
 Direct Labour
• Labor time that is physically traceable to the
products being manufactured
• Labor time whose cost is sufficiently large to
justify the record keeping expenses necessary
to trace the costs to individual products
Example:
Direct labor for manufacturing Honda Accords
• Line workers, robot operators, painters,
assembly workers
 Direct Expenses
• Carriage on Goods
• Insurance of Goods
• Oil & Power
 Indirect Costs
a. Indirect Materials (IM) – Materials, used in the
manufacturing of products, which are difficult to trace to
particular products in an economical way
• Glue, nails, cleaning supplies

b. Indirect Labor (IL) – Labor, used in the manufacturing of

products, which is difficult to trace to particular products
in an economical way
• Wages for maintenance workers, factory supervisor’s
salary, idle time
C. Indirect Expenses
• Depreciation on machinery, depreciation on factory
building, factory insurance, utilities for factory
 Accumulation, Allocation,
Apportionment and Absorption
• Accumulation/ Collection : Pooling the
overheads in logical groups .
• Allocation: Tracing/ Assigning the Whole
Item to a cost centre.
• Apportionment : Distribution of Overheads
to more than one cost centre.
• Absorption: Charging the overheads from
Cost centre to cost objects
COST DRIVER

A cost driver is a factor such as

the level of activity or volume,
that casually affects costs. That
is, a cause and effect relationship
exists between a change in level
of activity or volume and a
change in the level of total costs
of that cost object.
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Example
Activities Cost Driver
Machining Machine Hours
operations

Setup Setup Hours

Inspection Pieces Inspected
Order Cost Purchase Orders
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Functional Classification
Period and Product Costs
Product Costs or Inventoriable Costs – costs assigned to
products that were either purchased for resale (merchandising
firm or retailer) or manufactured for sale (manufacturing firm)
• When products are sold, product costs are recognized as an
expense (cost of goods sold or COGS). The costs of unsold
products remain in inventory and are not expensed (i.e. not
deducted from revenue in calculating net income)

Period Costs – costs that are not product costs and that are
associated with the period in which they are incurred
• Period costs such as selling and administrative costs are
expensed (i.e. deducted from revenue in calculating net
income) in the period they are incurred
Product Costs Versus Period
Costs
Product costs include Period costs are not
direct materials, direct included in product
labor, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold
Expense

Sale

Balance Income Income

Sheet Statement Statement
According to Behaviour
 Cost Classification for Decision
Making
• Relevant Cost- refers to the incremental and avoidable
cost of implementing a business decision. Ex- Future Cash
Flow
• Sunk Cost- Sunk cost is expenditure which has already
been incurred in the past. Sunk cost is irrelevant because
it does not affect the future cash flows of a business
• Opportunity Cost
• Imputed Cost- cost that is incurred by virtue of using an
asset instead of investing it or undertaking an alternative
course of action. An imputed cost is an invisible cost that is
not incurred directly
 …Cost Classification for Decision
Making
• Marginal Cost- Marginal cost is the cost
of the next unit or one additional unit of
volume or output.
• Differential Cost/ Incremental Cost- –
additional costs incurred when choosing a
certain course of action over another
(Note that incremental costs can include
opportunity costs)
 …Cost Classification for Decision
Making
• Normal Cost- Normal Cost are the normal or regular costs
which are incurred in the normal conditions during the normal
operations of the organization. They are the sum of actual
direct materials cost, actual labour cost and other direct
expense. Example: repairs, maintenance, salaries paid to
employees.

• Abnormal Cost- Abnormal Cost are the costs which are

unusual or irregular which are not incurred due to abnormal
situation s of the operations or productions. Example:
destruction due to fire, shut down of machinery, lock outs, etc.
•
 …Cost Classification for Decision
Making
• Controllable Cost- Controllable costs are
costs that can be influenced or regulated
by the manager or head responsible for it.
• Non-Controllable Cost- are those that
are not under the control of a specified
manager. These cannot be influenced by
decisions or actions of the manager
Classification according to Stage of Identification