Costing Terms and Concepts Flashcards
What is Management Accounting?
Collecting and analysing both financial and non-financial information to assist in effective performance measurement, planning, controlling, and decision making.
It focuses on communicating this information to management and has no statutory requirements.
What are the key roles of Management Accounting?
- Cost Analysis
- Planning and budgeting
- Decision-making
- Evaluating business performance
- Accountability and responsibility
These roles help organizations improve their performance and decision-making processes.
What is Cost Accounting?
An application of management accounting that records planned and actual costs of products, services, or departments for internal reporting.
It focuses on costs necessary for carrying out organizational operations.
Define ‘Cost’.
The expenditure on goods and services required to carry out the operations of an organisation.
This includes all necessary expenses incurred.
What is a Cost Object?
Any item or activity for which a separate measurement of cost is required, such as products, services, projects, departments, or customers.
It helps in determining the cost associated with specific items.
What is a Cost Unit?
A unit of product, service, or time in relation to which costs are ascertained, for example, a single item or one hour of service.
It serves as a basis for calculating costs.
What are Standard Costs?
Target costs that are predetermined and should be incurred under efficient operating conditions.
They serve as a benchmark for evaluating performance.
Define ‘Cost Driver’.
Any factors that affect costs.
Understanding cost drivers is essential for managing and controlling costs effectively.
What are the two broad stages of a Cost Collection System?
- Accumulates costs by classifying them into certain categories (e.g., labour costs, materials, overheads)
- Assigns costs to cost objects (products/services)
This system is crucial for accurate internal reporting.
How can costs be classified by Element?
- Materials
- Labour
- Expenses
This classification helps in understanding the nature of costs involved.
What are Direct Costs?
Costs that can be specifically and exclusively traced to the cost object.
Examples include direct materials, direct labour, and direct expenses.
What are Indirect Costs?
Costs that cannot be traced to the cost object.
They include overheads such as rent, utilities, and depreciation.
Define Product Costs.
Costs associated with goods/services purchased or produced for sale, included in inventory valuation.
Examples include raw materials, factory labour, and factory overheads.
What are Period Costs?
Costs expensed in the period they occur, not included in inventory valuation.
Examples include selling expenses and administrative costs.
Define Relevant Costs.
Future costs that will be changed by a decision, which must relate to the objectives of the business, be a future cost, and vary with the decision.
An example is opportunity cost.
What are Irrelevant Costs?
Costs that are the same irrespective of which decision is made, such as sunk costs.
These costs should not be considered in decision-making.
What is Incremental Cost?
The difference in terms of cost (or revenue) between each alternative course of action being considered.
It helps in evaluating the financial impact of different choices.
Define Marginal Cost.
The additional cost of (or revenue from) one extra unit of output.
This concept is important for pricing and production decisions.
