Understanding Different Types of Costs in Management

Cost

monetary amount that must be paid to acquire goods and services or resource sacrificed or forgone to achieve a specific objective

Cost object

anything for which a separate measurement of costs is needed/desired

Cost pool

an account in which a variety of similar costs are accumulated prior to allocation to cost objects. It is a group of costs associated with an activity. Example: overhead account.

Cost driver

a factor that causes a change in the cost pool for a particular activity. It is used as a basis for cost allocation; any factor or activity that has a direct cause-effect relationship.

Activity

any event, action, transaction, or work sequence that incurs costs when producing a product or providing a service.

Manufacturing costs

costs incurred to convert raw materials into finished goods. These include cost of raw materials used (direct materials), direct labor, and factory overhead.

Direct material costs

raw materials in stock and awaiting use in the manufacturing process.

Direct labor costs

cost of salaries, wages, and fringe benefits for personnel who work directly on the manufactured products.

Manufacturing overhead / Factory overhead costs

all other costs of manufacturing which includes three types of costs: indirect materials, indirect labor and other manufacturing costs.

Prime cost

Direct materials + direct labor.

Conversion cost

Factory overhead + direct labor.

Non-manufacturing costs

all costs that are not part of manufacturing costs. These include selling expenses (such as advertising costs, delivery expense, and salaries of salesmen) and administrative expenses (such as salaries of executives and legal expenses).

Product costs / Inventoriable costs

These costs are used to value inventory of manufactured goods or merchandise until the goods are sold. In the period of sale, the manufacturing costs are recognized as expense called the cost of goods sold. All manufacturing costs are product costs.

Period costs

These costs are identified with the period of time in which they are incurred rather than with units purchased or produced. Period costs are recognized as expenses during the period in which are incurred. All non-manufacturing costs are period costs.

Direct costs

those that can be traced directly to a particular cost object such as a product, department, or branch. These include materials and labor.

Indirect costs

those that are not directly traceable to a particular cost object. They are also called common costs or joint costs. Indirect costs include factory overhead and operating costs that benefit more than one product, department, or branch.

Variable costs

Vary in total in direct proportion to changes in activity level; however, variable cost per unit remains the same as activity level changes.

Fixed costs

Costs that remain constant in total regardless of changes in activity level; however, per unit fixed cost declines as the level of activity changes.

Mixed costs / Semi-variable costs

Costs that vary in total but not in proportion to change in activity level, including a fixed and a variable portion.

Controllable costs

Refer to costs that can be influenced by the managers.

Uncontrollable costs

Refer to costs that cannot be influenced by the managers.

Relevant cost

Cost that will differ among alternative courses and will affect the future.

Standard cost

Predetermined cost based on reasonable bases such as experiences, budgeted amounts, industry standards, etc.

Opportunity cost

Benefit forgone or given up when an alternative is chosen over the other/s.

Sunk cost

Historical costs or costs that are incurred in the past and will not make any difference in making a decision.

Out-of-pocket costs

Those that require the payment of cash or other asset as a result of their incurrence.

Differential cost

The amount by which the costs differ under alternative actions.

Marginal cost

Extra cost incurred when one additional unit is produced.

Incremental cost

Total additional cost associated with the decision to expand output or to add a new variety of product.

Avoidable cost

Cost that is not incurred if the activity is not performed.

Unavoidable cost

Cost that is still incurred even if the activity is not performed.

Committed cost

Costs that result from an organization's ownership or use of facilities and its basic organization structure.

Discretionary cost

Arises as a result of management decision to spend a particular amount of money for some purpose.

Average cost per unit

Total cost, for whatever quantity is manufactured, divided by the number of units manufactured.