In accounting, a cost measures how much you pay for something. Management and cost accounting must give managers accurate cost information relevant to their management decisions. Here are several cost-related terms you encounter in management accounting:
Direct cost: Cost that you can trace to a specific product.
Indirect cost: Cost that you can’t easily trace to a specific product.
Materials: Physical things you need to make products.
Labour: Work needed to make products.
Production Overhead: Indirect materials, indirect labour and other miscellaneous costs needed to make products.
Variable costs: Costs that change in direct proportion with activity level.
Fixed costs: Costs that don’t change with activity level.
Semi-variable costs: Combination of fixed and variable costs.
Contribution: Sales less variable costs.
Product costs: Costs needed to make goods; considered part of inventory until sold.
Period costs: Costs not needed to make goods; recorded as expenses when incurred.
Work-in-process cost: Costs incurred for goods that are part-finished.
Finished goods cost: Costs incurred for goods completed but not yet sold.
Cost of goods manufactured: The cost of the goods completed during a period.
Cost of goods sold: The cost of making goods that you sold.
Controllable costs: Costs that you can change.
Non-controllable costs: Costs that you can’t change.
Conversion costs: Direct labour and overhead.
Incremental costs: Costs that change depending on which alternative you choose; also known as relevant costs and marginal costs.
Irrelevant costs: Costs that don’t change depending on which alternative you choose.
Opportunity costs: Costs of income lost because you chose a different alternative.
Sunk costs: Costs you’ve already paid or committed to paying.
Historical cost: How much you originally paid for something.
Cost per unit: Cost of a single unit of product.
Expense: Costs deducted from revenues on the income statement.
Cost driver: Factor thought to affect particular costs.
Process cost: Cost of similar goods made in large quantities on an assembly line.
Job order cost: Cost of a batch of specially made goods.
Absorption cost: Cost that includes direct and a share of production overheads.
Target cost: Cost goal set for engineers designing a product.
