Activity-Based Costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services.
To assimilate or incorporate amounts in an account or a group of accounts so that they are absorbed and lose their identity.
Absorption costing, also known as full absorption costing or total absorption costing, is a cost accounting method where all overheads of an organization are charged to production by means of absorption.
Absorption costing is a methodology used to allocate all manufacturing costs to the production units. It is generally used in traditional costing systems.
In activity-based costing (ABC) systems, an activity refers to any operation performed within an organization that causes costs to be incurred. Examples include processing an order, writing a letter, designing a product, and visiting a customer. This concept is integral to accurately allocating costs based on actual activities.
An activity cost pool in activity-based costing groups indirect costs according to activities to allocate costs effectively.
An activity measure in activity-based costing (ABC) systems is a metric that gauges the volume or rate of an activity. It serves as a basis for cost allocation within an activity cost pool, correlating changes in the measure with changes in total activity cost.
Activity-Based Costing (ABC) is an accounting method of cost allocation that assigns costs to products and services based on the activities and resources that they consume.
Allocation in accounting refers to the process of distributing resources, costs, or investments among various accounting entities or activities.
In management accounting, an allocation base is used to distribute costs to cost objects. A crucial component of both traditional costing systems and Activity-Based Costing (ABC), the allocation base plays a significant role in accurate cost allocation.
Applied overhead refers to the indirect costs allocated to produced goods or services in a firm’s manufacturing process. These include costs such as utilities, rent, and salaries of the administrative staff.
Cost apportionment is the method of charging a proportion of a cost to a cost centre or cost unit because these cost centres or units share in incurring those costs without directly incurring them. A basis of apportionment is always required.
An arbitrary allocation refers to a cost allocation process that uses an allocation base unlikely to yield accurate costs. Examples include using the number of students to allocate the cost of a lecture, irrespective of the class size.
The basis used for the equitable apportionment of costs between several cost centres when direct assignment is not feasible.
Cause-and-effect allocation is a cost allocation method where the allocation base is a significant determinant of the cost. This method ensures accurate assignment of indirect costs to cost objects.
Common costs refer to the expenses shared by multiple products, processes, or departments before any differentiation occurs. These can often be fixed costs and are important in allocations to determine accurate product costing.
Contract costing is a costing technique used for long-term contracts like civil engineering projects, where costs are allocated on a contract-by-contract basis. It addresses the complications in determining annual profits for incomplete contracts through the valuation of work in progress.
Cost allocation is the process of assigning indirect costs to specific cost objects in a way that reflects resource consumption. This is crucial for making informed decisions, setting prices, and measuring profitability.
Cost Application refers to the allocation of costs to a product, process, or department using a rational allocation basis. For example, rent expense can be allocated to each department based on its square footage.
Cost apportionment, a vital concept in accounting, involves the distribution of costs across various departments, products, or periods based on specific criteria. This ensures that expenses are accurately allocated, enabling precise financial tracking and reporting.
A cost center is a non-revenue-producing segment of an organization where costs are separately figured and allocated, and for which someone has formal responsibility. Common examples include departments like Human Resources (HR) and IT services.
In a system of activity-based costing, any factor such as the number of units, number of transactions, or duration of transactions that drives the costs arising from a particular activity. When such factors can be clearly identified and measured, they serve as the basis for allocating costs to cost objects.
Cost tracing refers to the process of directly associating costs with specific cost objects such as projects, departments, or products, ensuring more accurate tracking of financial performance.
A costing method is a practice that organizations use to value and allocate costs associated with producing goods or services. The choice of costing method can significantly impact the financial reporting and management decision-making processes of a business.
A discrete section of an organization under the responsibility of a department manager; separate costs and, where appropriate, income are allocated or apportioned to the department for the purposes of costing, performance appraisal, and control.
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It reflects the asset's usage, wear and tear, or obsolescence.
A Direct Charge Voucher (DCV) is a financial document used in accounting to record direct expenses incurred by an organization, facilitating efficient and accurate tracking of specific chargeable items to appropriate accounts or projects.
Product costs that can be directly traced to a product or cost unit. They encompass direct materials, direct labor, and direct expenses that are attributable to the product without the need for cost apportionment.
Equitable apportionment refers to the process of sharing common costs between different cost centres in a fair and just manner. This is done using a basis of apportionment that accurately reflects how the costs are incurred by each cost centre.
The fixed overhead absorption rate is calculated by dividing the budgeted fixed overheads by the budgeted production units or other budgeted production measures, reflecting the allocation of fixed manufacturing overheads to individual units of production.
Full absorption costing, also known as absorption costing, is a method of accounting that captures all direct and indirect manufacturing expenses when determining the cost of the final product.
Full cost pricing is a method of setting the selling prices of a product or service that ensures the price is based on all the costs likely to be incurred in its supply.
The Full Costing Method is an extensive approach in accounting that includes all the costs associated with producing a product or service, encompassing both direct costs and overheads allocated to the cost unit.
An indirect cost centre refers to a division or department within an organization that incurs costs but does not directly generate revenue. These centres typically support the production of goods or services.
Indirect manufacturing costs, also referred to as factory overhead, are expenses that cannot be directly tied to a specific product or production process. These costs include maintenance, utilities, and depreciation of manufacturing equipment.
Joint costs are costs that are incurred up to the point where multiple products are separately identifiable in a production process. They are essential in evaluating the cost-effectiveness and profitability of production processes.
In process costing, the costs incurred prior to the separation point after which the joint products are treated individually. Joint costs are therefore common to the joint products and need to be apportioned to determine individual product costs.
The common cost incurred in a production process that results in multiple products, typically allocated based on relative selling prices.
Machine Hour Rate is an absorption rate used in absorption costing, calculated to allocate overheads to products based on the hours machines are used in the manufacturing process.
Manufacturing expenses, often referred to as manufacturing costs, encompass all the financial expenditures required to produce goods. These costs are crucial for businesses as they significantly impact pricing, budgeting, and overall profitability.
Overhead cost absorbed refers to the overhead costs allocated to the actual production during a period, calculated by multiplying actual production by the budgeted overhead absorption rate.
The overhead distribution summary provides an overview of how indirect costs are allocated across various departments or cost centers within an organization. It is a crucial aspect of cost accounting that helps in accurate product costing and budgeting.
In absorption costing, percentage on direct labour cost serves as a crucial method for allocating production overheads to cost units, ensuring accurate accounting and cost management.
A basis used in absorption costing for allocating manufacturing overhead to the cost units produced. This method involves applying a percentage of the prime cost to determine the overhead allocation.
Process costing is a method of costing used primarily in manufacturing where goods or services result from a sequence of continuous or repetitive operations.
A basis used in absorption costing for absorbing manufacturing overhead into the cost units produced. It is essential for allocating overhead costs accurately in a manufacturing environment.
A basis used in absorption costing for absorbing manufacturing overhead into the cost units produced.
Reciprocal Costs involve the apportionment of costs between service cost centers and production cost centers in a mutually interactive manner. This ensures that the costs of support services are accurately allocated to the production activities, allowing for precise cost control and financial analysis.
An accounting term related to overhead costs that have been recovered or anticipated to be recovered through cost allocation.
A service department, also known as a service cost centre, is a division within an organization that provides essential services to other departments but does not directly produce goods. These departments indirectly contribute to the organization's overall productivity by supporting operating departments.
A single-capacity system in accounting refers to an accounting structure in which each activity or cost element is identified as serving only one purpose—either serving as a cost center or a revenue generator. Unlike the dual-capacity system, the single-capacity system does not recognize dual roles for cost centers or activities.
Specific Order Costing, often compared to job costing, is a method of assigning production costs to a distinct batch or order. It provides a bespoke way to track the profitability and efficiency of unique production runs.
