Cost Glossary with Brief Explanations

Cost Glossary with Brief Explanations

Cost Glossary, Common Cost  A cost that supports more than one area, function, product, or duty.  It will be an Indirect Cost and a Manufacturing/Factory Overhead cost.

Conversion Cost  [Factory Overhead/Manufacturing Overhead and Direct Labor]. These two costs in combination.  The costs needed to CONVERT raw materials to finished product, but raw materials are not part of this cost.

Cost  Expenditures/charges incurred.  Incurred does not necessarily mean paid for now; it can mean owed.  Traditionally costs were associated with the product and expenses were non-product.  Now the terms cost and product are often used interchangeably.But you will still see “cost” used most often when the product is involved.

Costs of Production The 3 costs of production are Direct Materials, Direct Labor, and Manufacturing/Factory Overhead.

Direct Cost  Hands on cost to make product.  Direct Materials and Direct Labor are both direct costs.

Direct Labor“Touch labor.”  Labor in direct contact with the product, required to make the product. It is one of the 3 costs of production.

Direct MaterialsThe raw materials required to make the product.  Materials that are part of the product. It is one of the 3 costs of production.

ExpenseExpenditures/charges incurred.  Incurred does not necessarily mean paid for now; it can mean owed.  Traditionally expenses were non-product uses of goods and services.  Now the terms cost and expense are often used interchangeably.

Factory OverheadManufacturing Overhead is the more recent term as “factory” is a term more associated with the past. Way in the past, Factory Burden was the term. Factory/Manufacturing Overhead is the catchall for all product costs that are not either Direct Labor or Direct Material.  All indirect manufacturing costs are Factory/Manufacturing Overhead. Examples include electricity in the manufacturing plant, cleaning supplies used on the production line, salaries of employees that repair production equipment but do not create the product, and property taxes on the manufacturing plant.

Fixed cost/expenseUnchangedas a total with the volume of activity; a constant amount. Unit fixed cost varies inversely with volume.

Fixed Manufacturing Overhead CostsFixed costs related only to the manufacturing process.  Because the fixed manufacturing overhead costs are absorbed into inventory under the absorption method, they are expensed only when inventory is sold.  The fixed manufacturing overhead costs are expensed entirely in the period in which they are incurred in the variable or contribution margin method.  As a result it is the fixed manufacturing overhead costs that account for the difference between the absorption and variable methods of preparing the income statement.

Indirect CostA cost that cannot be traced directly to a product or process.  The cost is shared by more than one area, duty or function.  Indirect costs are always Common Costs and Manufacturing/Factory Overhead Costs.

Indirect Labor CostA labor costthat cannot be traced directly to a product or process.  The cost is shared by more than one area, duty or function.  Indirect Labor is always a Manufacturing/Factory Overhead Cost and a Common Cost.

 Indirect Materials CostA materials costthat cannot be traced directly to a product or process.  The cost is shared by more than one area, duty or function.  Indirect Materials is always a Manufacturing/Factory Overhead Cost and a Common Cost.

Inventoriable Costs The costs that make up inventory.  The Direct Materials and Direct Labor and Variable Manufacturing Overhead costs will always be included.  If absorption costing is used, then Fixed Manufacturing Overhead will also be included.

Manufacturing Costs:These are the costs of production:  Direct Materials, Direct Labor, and Manufacturing/Factory Overhead.

Manufacturing OverheadAlso called Factory Overhead, a term associated with the past. Way in the past, Factory Burden was the term. Manufacturing/Factory Overhead is the catchall for all product costs that are not either Direct Labor or Direct Material.  All indirect manufacturing costs are Factory/Manufacturing Overhead. Examples include electricity in the manufacturing plant, cleaning supplies used on the production line, salaries of employees that repair production equipment but do not create the product, and property taxes on the manufacturing plant.

Nonmanufacturing costsNot related to creating the product.  NOT Direct Materials, Direct Labor, and Manufacturing/Factory Overhead.  Period expenses are nonmanufacturing costs.

Mixed CostCosts that contain elements of both fixed and variable costs.  Also called semi-variable cost.

Opportunity CostThis may or may not be quantifiable and it is never recorded or included in financial reports.  It is what is given up by choosing one alternative over the other.

Period expense/costGoods or services used that represent/benefit a specified time frame.  Nonmanufacturing costs.

Prime Cost[Direct Materials and Direct Labor]. These two costs in combination.

Product Cost  Inventoriable cost.  Direct Material, Direct, Direct Labor, Variable Manufacturing Overhead.  Under the absorption method of accounting, Fixed Manufacturing Overhead is also included. Product costs include the 3 costs of production.

Relevant CostWith respect to managerial/cost accounting, relevance is synonymous with difference.  What is relevant is what differs between or among alternatives.  This is a different meaning of relevance from everyday usage.

Semi-variable costCosts that contain elements of both fixed and variable costs.  Also called mixed cost.

Sunk CostIt is never recorded or included in financial reports.  Once this cost/expenditure has been incurred, it cannot be recouped.  It is gone forever, regardless of other alternatives chosen.

Variable Manufacturing Overhead CostsThe part of manufacturing/factory costs that change with volume.  The variable manufacturing costs are treated the same as Direct Materials and Direct Labor.

Variable cost/expenseVaries as a total with volume of activity. Remains constant on a per unit basis.

Cost Glossary

Cost Glossary