Cost and management accounting: Foundational key terms / learning points

In this short piece, I shall be sharing certain key terms from cost and management accounting. Knowing these terms is so critical to building the basic foundation needed to understand the concept of cost and management accounting. So, let’s begin.

The followings are key terms / learning points on the basic elements of cost accounting, strategic cost management, cost analysis and break-even point:

• Allocation key: this is the fundamental basis for allocating costs. It is measured based on man-hours used, employees total, and square meters occupied. The number of recipients of the cost will determine the allocation key. The more the employees, the more the allocation.

• Allocation source: allocation source makes known the costs to be allocated. This is defined in what is called allocation source and target tables. 

• Allocation target: allocation target tells us where the costs are allocated. Every allocation has a source of allocation and target tables for the allocation.

• Cost accounting: here, the actual costs of products, departments, processes, and cost of operations are recorded. These costs are done by using different methods.

• Cost type: this describes the particular cost type of cost used, which differentiate one cost from the other.

• Cost center: this is the department and profit center that takes care of the costs and income of the company.

• Cost object: these are the products, services and final goods of a company that shares that carries the costs at the end of the day. It is on the bases of these that cost has come to stay.

• Cost allocation: this is a situation where we allocate costs to cost centers or cost objects. As an example, the salary of a bike rider for food department is sent to the food department cost center.  

• Dynamic allocation: this particularly depend on changeable allocation bases.  

• Direct cost: this is the cost that can be allocated to a cost object directly. When you purchase a specific product, you directly attach the cost to it.  

• Fixed cost: this does not depend on the level of goods or services which is produced by an organization. They are time related and are different from variable costs.

• Indirect cost: this cost is not directly attached to a cost object. It may either be variable or fixed.   

• Level: this is defined as a numeric between 1 and 99. It is used to define order of allocation. But we should note that the allocation posting follows the order of the levels.  

• Static allocation: these are based on a fixed set of values. 

• Operational cost: these are expenses that keeps recurring and is related to the operation of a business.

• Overhead cost: this is the current expenses being used to operate a business. It includes travels, depreciation, interest, fees, rent, supplies, advertising, accounting fees, etc.

• Step variable cost: this is a cost that change at a point because it involves large transactions that cannot be spread out over time.

• Share static weighting: this is the portion that is given among cost objects of cost centers.

• Variable cost: this is an expense that changes in proportion to the various activities going on in the business.

• Variant: this used as a user-defined label for resources allocations. It is actually optional.

It is imperative to keep tab on the afore mentioned key terms and learning points, as we explore the principles which surround the concept of cost and management accounting.

By: Andrew Omeike

#MEMBA 11