Cost Terms, Concepts, and Classifications

Chapter 2: Cost Terms, Concepts, and Classifications

Administrative costs: All executive, organizational, and clerical costs associated with the general management of an organization rather than manufacturing or selling.

Common cost: A cost that is incurred to support a number of cost objects but that cannot be traced to them individually.

Conversion cost: Direct labor cost plus manufacturing overhead cost.

Cost behavior: The way in which a cost reacts to changes in the level of activity.

Cost object: Anything for which cost data are desired. Examples of cost objects are products, customers, jobs, and parts of the organization such as departments or divisions.

Cost of goods manufactured: The manufacturing costs associated with the goods that were finished during the period.

Differential cost: A difference in cost between two alternatives.

Differential revenue: The difference in revenue between two alternatives.

Direct cost: A cost that can be easily and conveniently traced to a specified cost object.

Direct labor: Factory labor costs that can be easily traced to individual units of product. Also called touch labor.

Direct materials: Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

Finished goods: Units of products that have been completed but not yet sold to customers.

Fixed cost: A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity.

Incremental cost: An increase in cost between two alternatives.

Indirect cost: A cost that cannot be easily and conveniently traced to a specified cost object.

Indirect labor: The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

Indirect materials: Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Inventoriable costs: Synonym for product costs.

Manufacturing overhead: All manufacturing costs except direct materials and direct labor.

Opportunity costs: The potential benefit that is given up when one alternative is selected over another.

Period costs: Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued.

Prime cost: Direct materials cost plus direct labor cost.

Product costs: All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.

Raw materials: Any materials that go into the final product.

Relevant range: The range of activity within which assumptions about variable and fixed cost behavior are valid.

Schedule of cost of goods manufactured: A schedule showing the direct materials, direct labor, and manufacturing overhead costs incurred during a period and the portion of those costs that are assigned to Work in Process and Finished Goods.

Selling costs: All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer.

Sunk cost: A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Variable cost: A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.

Work in process: Units of product that are only partially complete.

Appraisal costs: Costs that are incurred to identify defective products before the products are shipped to customers.

External failure costs: Costs that are incurred when a product or service that is defective is delivered to a customer.

Internal failure costs: Costs that are incurred as a result of identifying defective products before they are shipped to customers.

ISO 9000 standards: Quality control requirements issued by the International Organization for Standardization that relate to products sold in European countries.

Quality circles: Small groups of employees that meet on a regular basis to discuss ways of improving quality.

Quality cost: Costs that are incurred to prevent defective products from falling into the hands of customers or that are incurred as a result of defective units.

Quality cost report: A report that details prevention costs, appraisal costs, and the costs of internal and external failures.

Quality of conformance: The degree to which a product or service meets or exceeds its design specification and is free of defects or other problems that mar its appearance or degrade its performance.

Statistical process control: A charting technique used to monitor the quality of work being done in a workstation for the purpose of immediately correcting any problems.