Glossary of Costing Methods and Concepts

Absorption costing

A costing method that includes all manufacturing costs-direct materials, direct labor, and both variable and fixed manufacturing overhead-in unit product costs.

Allocation base

A measure of activity such as direct labor-hours or machine-hours used to assign costs to cost objects.

Bill of materials

A document showing the quantity of each type of direct material required to make a product.

Cost driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Cost-plus pricing

A pricing method in which a predetermined markup is applied to a cost base to determine the target selling price.

Job cost sheet

A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job.

Job order costing

A costing system used in situations where many different products, jobs, or services are produced each period.

Materials requisition form

A document specifying the type and quantity of materials to be drawn from the storeroom and the job charged for the cost of those materials.

Multiple predetermined overhead rates

A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company.

Normal cost system

A costing system that applies overhead costs to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Overhead application

The process of assigning overhead cost to specific jobs.

Plantwide overhead rate

A single predetermined overhead rate used throughout a plant.

Predetermined overhead rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period, computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base.

Time ticket

A document that records the amount of time an employee spends on various activities.

Activity

An event causing the consumption of overhead resources.

Activity cost pool

A 'bucket' that accumulates costs related to a single activity measure in an activity-based costing system.

Activity measure

An allocation base in an activity-based costing system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool.

Activity-based costing (ABC)

A costing method based on activities that provides managers with cost information for strategic and other decisions potentially affecting capacity and therefore fixed as well as variable costs.

Activity-based management (ABM)

A management approach focusing on managing activities as a way of eliminating waste and reducing delays and defects.

Batch-level activities

Activities performed each time a batch of goods is handled or processed, regardless of how many units are in the batch.

Benchmarking

A systematic approach to identifying the activities with the greatest potential for improvement.

Customer-level activities

Activities carried out to support customers that are unrelated to specific products.

Duration driver

A measure of the time required to perform an activity.

First-stage allocation

The process of assigning overhead costs to activity cost pools in an activity-based costing system.

Organization-sustaining activities

Activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made.

Product-level activities

Activities related to specific products that must be performed regardless of how many units are produced and sold or batches run.

Second-stage allocation

Using activity rates to apply costs to products and customers in activity-based costing.

Transaction driver

A count of the number of times an activity occurs.

Unit-level activities

Activities performed each time a unit is produced.