Topic 2: Cost Accounting

term 1

Definition of cost

An economic sacrifice of resources to produce a product or service

Direct cost definition

Cost easily traced to a specific product or job

Indirect cost definition

Cost not easily traced to a specific product or job

Direct materials definition

Raw materials that become part of the finished product

Direct labour definition

Wages of employees directly making the product

Factory overhead definition

All indirect factory costs such as indirect materials indirect labour and factory expenses

Examples of factory overhead

Factory electricity rent depreciation repairs insurance supervisors

Product cost definition

Costs directly linked to manufacturing a product

Period cost definition

Costs linked to a time period not a product

Cost object definition

Item or job for which costs are measured

Purpose of cost accounting

Measure analyse record and report product or service costs

Why cost accounting is useful

Control costs estimate future costs value inventory set prices assess profitability

Job costing definition

Method of costing used when each job is unique or custom made

Businesses using job costing

Custom manufacturing printing construction specialised equipment

Key features of job costing

Each job tracked separately each job uses specific materials and labour

Predetermined overhead rate definition

Estimated overhead divided by estimated activity base

Cost driver definition

Factor used to allocate overhead such as labour hours or machine hours

Why overhead must be allocated

Indirect costs cannot be traced to a single job so must be allocated fairly

Mark up definition

Percentage added to cost to determine selling price

Purpose of mark up

Cover costs and generate profit

Standard costing definition

Predetermined estimated unit cost used as a benchmark

Purpose of standard costing

Compare actual costs to standards to identify variances

Businesses using standard costing

Mass production repetitive manufacturing clothing food drink car assembly

Variance definition

Difference between actual cost and standard cost

Material price variance definition

Difference between actual price and standard price of materials

Material usage variance definition

Difference between actual quantity used and standard quantity allowed

Labour rate variance definition

Difference between actual wage rate and standard wage rate

Labour efficiency variance definition

Difference between actual hours worked and standard hours allowed

Why variances occur

Changes in prices poor workmanship waste errors or uncontrollable events