COST AND MANAGEMENT ACCOUNTING TERMINOLOGIES

In this post, I will like to discuss some terminologies used in Cost and Management Accounting, but before I go further, I will like to give a brief explanation of the term “cost”.

What is Cost?

Cost reflects the monetary measure of the value of resources used to attain an objective. It is the amount we spend on something that satisfies our needs.

Therefore, Cost management is the process of planning and controlling the budget of a business. It allows a business to predict impending expenditures to help reduce the chance of going over budget. Below are a few terminologies used in Cost and management accounting:

• Material cost – This is the cost of raw materials used for production. They are two types of material cost, they are direct and indirect material cost. Direct material costs are the raw materials used to produce or manufacture a product. This cost varies based on the level of production output. For example, flour for bread production. An Indirect material cost is a cost which is important in the process of production but is not a direct raw material used in the product itself. This means it is not an essential part of the product. Examples are personal protective equipment, disposable gloves etc. Please note that one material which is a direct material for one manufacturer can be indirect material for another manufacturer.
• Labour Cost – This is the cost of salaries, bonuses, wages, and commissions of the employees of a company. There are two types, which are direct labour cost and indirect labour cost. Direct Labour cost is the cost of labour directly involved in the process of production. For example, labourers engaged in textile production, and artisans engaged in the production of leather goods, etc. Indirect labour cost is the amount paid to workers who assist in the production process but are not directly involved in the production. Examples are security officers, cleaners, quality control staff etc.
• Expenses – This is the cost incurred in a production process. We can also say it is the expenditure other than labour and material. We have two types of expenses, they are direct expenses and indirect expenses. Examples of Direct expenses are the cost of hiring equipment required to produce a particular product, the cost of special patterns, the cost of transportation, cost of customized software needed for the production process. Examples of Indirect expenses are advertising, rent,  bank charges, depreciation, utility costs etc.
• Fixed cost – these are expenses that remain constant regardless of a company’s production volume. Examples of fixed costs are depreciation, interest cost, insurance, rent, and salaries.
• Variable cost – These are cost which changes in direct proportions to changes in activity level. Variable cost fluctuates when production in sales volume change. They go up when the production level increases and drop when a business output volume decreases. Examples of variable costs are sales commission, direct labour cost and raw material expenses.
• Factory Overhead: These are the expenses that are incurred in the production place or within factory premises. It is also known as Production Overhead or Works Overhead. For example rent, Indirect material, rates and factory tax etc.

Cost accounting is a vital aspect of accounting that helps business owners have a better understanding of how to manage their production budget, and project their costs. It aids them in decision-making and knowing whether to diversify or create a new product line.

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Written by Tutty Tero