Unlock Key Concepts of Cost Accounting: 100 Common Questions Answered

• Cost Accounting focuses on internal reporting for cost control.
• Financial Accounting focuses on external reporting for stakeholders.

• Ascertain costs accurately.
• Control and reduce costs.
• Assist in decision-making.
• Prepare cost-related reports.

• Direct materials: Raw materials used in production.
• Direct labor: Labor costs directly tied to production.
• Overheads: Indirect costs like rent and utilities.

A cost that can be traced directly to a product, department, or project (e.g., raw materials).

A cost not directly traceable to a specific product or project (e.g., factory rent).

A cost that remains constant, regardless of production levels (e.g., rent).

A cost that varies with the level of output (e.g., raw materials).

A cost that has both fixed and variable components (e.g., utility bills).

Any item for which costs are measured, such as a product, service, or department.

The process of assigning indirect costs to various cost objects.

The division of costs among different departments based on a fair proportion.

Allocating all costs (direct and indirect) to cost units or products.

A department or unit within an organization where costs are tracked but no revenue is generated (e.g., HR department).

A department that generates both revenue and incurs costs, allowing profit measurement.

A unit of product or service to which costs are assigned (e.g., per unit of output).

The additional cost incurred when producing one more unit of product.

A costing method where standard costs are predetermined for production and compared with actual costs.

A costing method that assigns overheads to products based on activities and resource usage.

• Standard costing uses a single rate for all overheads.
• ABC allocates costs based on activities.

A process of monitoring and regulating costs to keep them within budgeted limits.

The process of reducing costs without compromising quality or performance.

A tool to determine the sales level at which total revenue equals total costs.

The point at which no profit or loss is made (Total Revenue = Total Costs).

Formula: Break-even point = Fixed Costs ÷ (Selling Price per Unit - Variable Cost per Unit).

• The difference between sales revenue and variable costs.
• Formula: Contribution Margin = Sales - Variable Costs.

Contribution Margin = Sales Price per Unit - Variable Cost per Unit.

To provide a detailed breakdown of total costs for a product or service.

• The sum of direct materials and direct labor costs.
• Formula: Prime Cost = Direct Materials + Direct Labor.

• The cost incurred to convert raw materials into finished goods.
• Formula: Conversion Cost = Direct Labor + Manufacturing Overheads.

A method where costs are assigned to specific jobs or orders.

A method where costs are assigned to processes or departments in mass production environments.

• Job costing tracks costs for individual jobs.
• Process costing averages costs across all units produced.

A method used for large-scale contracts where costs are accumulated for a specific contract.

A method of costing where costs are assigned to batches of products.

A method where the cost per unit is calculated by dividing total costs by the number of units produced.

A method used to calculate costs in service industries (e.g., transport, hospitals).

A costing method for services, where costs are accumulated by the service provided (e.g., hospitality).

A factor that influences the cost of an activity (e.g., machine hours, labor hours).

A cost that has already been incurred and cannot be recovered.

The potential benefit lost when choosing one alternative over another.

The difference in total cost between two alternatives.

The additional cost associated with producing one more unit.

Costs that will affect future decision-making.

A method used to estimate variable and fixed costs by analyzing the highest and lowest activity levels.

A tool that examines how changes in costs and volume affect profit.

A pricing strategy where a product’s cost is determined by subtracting the desired profit from the market price.

The total cost of a product from design to disposal.

A concept that labor efficiency improves with increased production due to learning and experience.

A costing method where all fixed and variable costs are absorbed by units produced.

• Absorption costing includes fixed costs in product costs.
• Marginal costing includes only variable costs.

A costing method that assigns only variable costs to product costs.

A financial plan for a specific period that estimates revenues and expenses.

A process of comparing actual results with the budgeted figures to ensure financial goals are met.

A budget that adjusts with changes in activity levels.

A budgeting method where every expense must be justified from zero for each new period.

A budget that remains unchanged, regardless of activity levels.

The process of analyzing differences between budgeted and actual figures.

The difference between the actual and standard labor costs.

The difference between actual and standard material costs.

The difference between actual overhead costs and the standard or budgeted overhead costs.

• The difference between the actual cost of materials and the standard cost.
• Formula: (Actual Price - Standard Price) × Actual Quantity.

• The difference between the actual quantity of materials used and the standard quantity allowed.
• Formula: (Actual Quantity - Standard Quantity) × Standard Price.

• The difference between the actual wage rate and the standard wage rate.
• Formula: (Actual Rate - Standard Rate) × Actual Hours.

• The difference between actual labor hours used and standard labor hours allowed.
• Formula: (Actual Hours - Standard Hours) × Standard Rate.

The process of charging overhead costs to cost units using a predetermined overhead rate.

Occurs when the overheads charged to production are less than the actual overheads incurred.

Occurs when the overheads charged to production are more than the actual overheads incurred.

A loss that occurs naturally in the production process and cannot be avoided (e.g., evaporation, spoilage).

A loss that exceeds the normal expected loss and is usually due to inefficiencies or accidents.

Occurs when the actual loss is less than the expected or normal loss, resulting in a surplus.

A concept in process costing that converts partially completed units into an equivalent number of fully completed units.

A method that assigns costs to units in the order they are produced, with the first units produced being the first to be completed and sold.

A method that averages the costs of beginning inventory and current production to determine the cost per unit.

• The ideal order quantity that minimizes total inventory costs, including ordering and holding costs.
• Formula: EOQ = √(2 × Demand × Ordering Cost ÷ Holding Cost).

• The inventory level at which a new order should be placed to avoid stockouts.
• Formula: ROL = Lead Time × Average Usage.

• A measure of how quickly inventory is sold and replaced over a period.
• Formula: Cost of Goods Sold ÷ Average Inventory.

A system where inventory records are updated continuously with each transaction.

A system where inventory records are updated at the end of an accounting period based on a physical count.

A predetermined cost that serves as a benchmark for measuring actual performance.

The time during which employees are paid but are not engaged in productive work.

Idle time that is expected and unavoidable, such as time lost due to machine maintenance.

Idle time that exceeds the expected level due to inefficiencies or breakdowns.

• The rate at which employees leave a company and are replaced by new hires.
• Formula: (Number of Employees Left ÷ Average Number of Employees) × 100.

A wage system where employees are paid a higher rate for exceeding a specified production target and a lower rate for falling short of it.

An estimated cost that is planned for a future period, based on expected activity levels.

A cost that can be influenced or controlled by a manager (e.g., direct labor cost).

A cost that cannot be influenced by a manager (e.g., depreciation on equipment).

• The rate used to allocate overhead costs to products or services.
• Formula: Overheads ÷ Total Direct Labor Hours or Machine Hours.

• The level of sales at which total revenue equals total costs, resulting in zero profit.
• Formula: Break-even Sales = Fixed Costs ÷ Contribution Margin Ratio.

• The difference between actual sales and break-even sales.
• Formula: Margin of Safety = (Actual Sales - Break-even Sales) ÷ Actual Sales.

A technique that compares the costs and benefits of a decision to determine if it is worthwhile.

A technique used to assess how changes in variables (e.g., costs, sales volume) affect profitability.

An income statement where all manufacturing costs, both fixed and variable, are included in the cost of goods sold.

An income statement where only variable manufacturing costs are included in the cost of goods sold, and fixed costs are treated as period expenses.

• The cost per hour of direct labor.
• Formula: Direct Labor Rate = Total Direct Labor Costs ÷ Total Direct Labor Hours.

Costs incurred by departments that support production but do not produce goods directly (e.g., maintenance, HR).

Costs incurred by departments that are directly involved in producing goods or services.

• The time it takes for an investment to generate enough cash flow to recover its initial cost.
• Formula: Payback Period = Initial Investment ÷ Annual Cash Inflow.

• A measure of the profitability of an investment.
• Formula: ROI = (Net Profit ÷ Investment Cost) × 100.