Management Accounting SM 1 W 2

Definition-based vocabulary flashcards covering cost objectives, classifications (direct/indirect, product/period, fixed/variable), and decision-making cost concepts.

Cost

A measure of resources used or sacrificed to achieve a particular purpose.

Cost Objective

Any activity or purpose for which a separate measurement of costs is required, such as valuing inventory or making pricing decisions.

Cost Object

Anything for which cost information is desired, including products, services, customers, departments, projects, or business units.

Direct Costs

Costs that can be easily and economically traced to a specific cost object, such as direct materials and direct labour.

Direct Materials

Materials that become part of the finished product, such as the radio or mirrors for a Ferrari car.

Direct Labour

Workers directly involved in manufacturing the product, such as assembly workers.

Indirect Costs

Costs that cannot be directly traced to a specific product and must be allocated across products, such as factory cleaners or maintenance staff.

Manufacturing Overhead

A category of indirect costs including factory security, lubricants, cleaning supplies, and maintenance staff.

Prime Cost

$$\text{Direct Materials} + \text{Direct Labour}$$

Conversion Cost

$$\text{Direct Labour} + \text{Manufacturing Overhead}$$

Full Production Cost

$$\text{Direct Materials} + \text{Direct Labour} + \text{Manufacturing Overhead}$$

Matching Principle

Financial accounting principle stating that costs should be recognised in the same period as the revenues they help generate.

Product Costs

Costs incurred to manufacture or purchase products, initially recorded as inventory on the Balance Sheet and becoming expenses (COGS) only when sold.

Period Costs

All non-manufacturing costs that are expensed immediately in the Profit and Loss Statement, such as marketing costs and sales salaries.

Variable Cost

A cost that changes in total as activity changes, where the total increases with activity but the cost per unit remains constant.

Fixed Cost

A cost that remains constant in total regardless of activity level within a relevant range, while the cost per unit decreases as activity increases.

Relevant Range

The specific activity range within which fixed costs remain fixed before jumping to a higher level.

Committed Fixed Costs

Long-term fixed costs that are difficult to reduce, such as building and equipment depreciation.

Discretionary Fixed Costs

Fixed costs that can be changed by management in the short term, such as advertising and Research and Development.

Relevant Costs (Differential Costs)

Future costs that differ between alternatives in a decision-making process.

Differential Cost

The difference in cost between two alternatives.

Opportunity Cost

The benefit sacrificed by choosing one alternative over another, such as a forgone salary to attend university.

Sunk Costs

Costs that have already been incurred and cannot be changed by future decisions, such as the historical purchase cost of a car.