Basic Definitions Flashcards
Direct Material
Those material which are easily identified, conveniently measured and directly charged to the cost of Production
For e.g Lumber in case of Furniture
Crude Oil in case of Gasoline
Indirect Material
Those materials needed for the completion of a product but the consumption of which is so minimal or so complex that treating them as direct materials is futile.
Thus, they are consumed as part of the production process, but are not integrated in substantial amounts into a product or job.
Examples of indirect materials are:
Cleaning supplies Disposable safety equipment Disposable tools Fittings and fasteners Glue Tape Oil
Direct Labor
Direct labor is labor that are involved and actually work directly in a production process.
When a business manufactures products, direct labor is considered to be the labor of the production crew that produces goods, such as machine operators, assembly line operators, painters, and so forth.
Indirect Labor
Indirect labor is the cost of any labor that supports the production process, but which is not directly involved in the active conversion of materials into finished products.
Actual FOH
Factory overhead is the costs incurred during the manufacturing process, not including the costs of direct labor and materials.
Examples of factory overhead costs are:
Production supervisor salaries Quality assurance salaries Materials management salaries Factory rent Factory utilities Factory building insurance Fringe benefits Depreciation
Cost Accounting
Cost accounting is the process of collecting information about the costs incurred by a company’s activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage.
It is mostly concerned with developing an understanding of where a company earns and loses money, and providing input into decisions to generate profits in the future.
Standard Costing
Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records
Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities within a company.
Process Costing
Process costing is a costing methodology that arrives at an individual product cost through the calculation of average costs for large quantities of identical products.
Selling Expense
Selling expense (or sales expense) includes any costs incurred by the sales department, which typically include:
Salesperson salaries and wages Commissions Payroll taxes Benefits Travel and entertainment Facility rent / showroom rent Depreciation Advertising Promotional materials Utilities Other departmental administration costs
Administrative Expense
Expenses that an organisation incurs not directly tied to a specific function such as manufacturing or sales. These expenses are related to the organisation as a whole as opposed to an individual department.
Manufacturing Cost
It is the sum of costs of all resources consumed in the process of making a product.
Manufacturing costs include the costs of direct material, direct labor, and manufacturing overhead
An entity incurs these costs during the production process.
Prime Cost
Prime costs are the costs directly incurred to create a product. Prime costs comprises of Direct materials and labor excluding fixed costs.
Conversion Cost
Conversion costs are those costs required to convert raw materials into finished goods that are ready for sale.
Since conversion activities involve labor and manufacturing overhead, the calculation of conversion costs is:
Conversion costs = Direct labor + Manufacturing overhead
Thus, conversion costs are all manufacturing costs except for the cost of raw materials.
Examples of costs that may be considered conversion costs are:
Direct labor and related benefits Equipment depreciation Equipment maintenance Factory rent Factory supplies Factory insurance Machining Inspection Production utilities Production supervision Small tools charged to expense
Cost of Goods Sold
Cost of goods sold is the accumulated total of all costs used to create a product , which has been sold. These costs fall into the general sub-categories of direct labor, materials, and overhead.
It includes:
Opening Inventory plus cost of goods manufactured less Closing inventory
Cost of Goods Manufactured
The cost of goods manufactured is the cost assigned to units either completed or still in the process of being completed at the end of an accounting period, for that accounting period.
It is calculated by adding opening work in process in manufacturing cost and deducting closing work in process.
