Key Terms in Cost & Management Accounting

Franklyn Ohakim Written by Sir Franklyn · 2 min read >

What is Cost and management Accounting?

Cost and management accounting is a subset of accounting that identifies the cost object and center within an organization and calculates the costs related to it. It is the process of costing a specific item in an organization with the goal of creating a management account that will be used by the management to guide decision-making inside the organization in accordance with its policies and procedures.

Some key terms on the basic elements of cost accounting include the following:

  1. Fixed Cost:

Fixed cost can be described as a cost that does not change with an increase or decrease in the number of goods or services produced or sold. Fixed costs refers to the expenses that a company has to pay, independent of business activities.

  1. Variable Cost:

This refers to a company’s expense that changes depending on how much the company produces or sells. Variable costs may increase or decrease depending on a company’s production or sales volume—they rise as production rises and fall as production falls.

  1. Semi Fixed Cost:

Semi-fixed cost is described as a cost that contains both fixed and variable elements.

  1. Semi Variable Cost:

Semi variable costs refer to costs incurred by a company, which is a combination of variable costs and fixed costs.

  1. Direct cost (Prime Cost):

The accumulation of all the direct costs i.e. Direct Wages/Labour, Direct Materials, and Direct Expenses is called – Prime Cost or Direct Cost. Prime cost or direct cost is the sum of all the elements of costs which can be specifically identified with particular products or jobs.

  1. Capacity Utilization:

Capacity utilization can be described as the manufacturing / production capabilities that an economy or company uses to create output. It is a ratio that measures the proportion of potential output to the actual realized output.

  1. Contribution Margin

Contribution margin is described as the excess between the selling price of the product and the total variable costs.

  1. Margin of Safety

The margin of safety (safety margin), is the difference between actual sales and break-even sales. Companies can use the margin of safety to predict how much sales can decrease before the company or a project becomes unprofitable. 

  1. Direct material Cost

This refers to the cost of materials entering into and becoming elements of a product or saleable service. Materials which can be identified with units of service or output are called direct materials.

  1. Indirect Material Cost

Any materials that is used for the product other than the direct materials are called indirect materials. Hence, indirect material cost refers to materials cost which cannot be identified with a specific product, job, process.

  1. Indirect Cost (Overhead)

The accumulation of all the indirect costs i.e., Indirect Material, Indirect Labour and Indirect Expenses is variously termed as ‘On cost’ or ‘overhead’. Over heads or on cost or indirect cost cannot be identified with specific jobs or products. 

  1. Operating Cost

Operating costs refers to the ongoing expenses incurred from the normal daily running of a business. This includes both costs of goods sold (COGS) and other operating expenses.

  1. Labour

Labour is the wages paid for effort either physical or mental, expended in production and distribution of goods/services.

  1. Direct Wages (Direct Labour Cost)

Direct wages or labour cost refers to the cost of labour directly engaged in any production operations. Examples include: carpenters in a furniture making industry, workmen in assembling parts.

  1. Direct Expenses

Direct expenses refers to expenses which can be directly associated with a unit of output, process, job or operation. They are specifically incurred for a job, or unit or process and in no way connected with other jobs or processes.



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