Average Cost (also known as Weighted-Average Cost) is a method of determining the cost per unit by dividing total costs by the total output. This method includes recalculating the unit value for raw materials or finished goods after each new consignment.
Average Fixed Cost (AFC) is a financial metric in economics which is calculated by taking the total fixed costs (TFC) of production and dividing them by the total output (Q) produced. AFC helps in understanding how fixed costs are spread across units produced, giving insights into the cost structure of production.
A cost or income standard set in standard costing to form the basis on which other standards are set. It is a foundational metric from which other variances and standards can be derived.
Breakeven Analysis, also known as Cost-Volume-Profit (CVP) Analysis, is a managerial accounting technique in which costs are analyzed according to their fixed or variable nature and compared to sales revenue to determine the level of sales or production at which the business neither makes a profit nor incurs a loss.
A breakeven chart (or breakeven graph) is a visual tool used to depict the relationship between an organization's total costs—comprising fixed and variable costs—and its sales revenue across different levels of activity. The intersection point of these curves shows the breakeven point, where total costs equal total revenue.
The breakeven point is the level of production, sales volume, percentage of capacity, or sales revenue at which an organization makes neither a profit nor a loss. This critical financial metric helps businesses understand when they will start to become profitable.
Budget Cost Allowance refers to the amount of budgeted expenditure that a cost centre or budget centre is allowed to spend in relation to its budget, with consideration to the actual level of activity achieved during the budget period. It distinguishes between fixed and variable costs to adjust expenditure limits.
A capital intensive business involves significant investment in fixed assets such as plant and machinery. These companies are regarded as high-risk investments, particularly in times of economic downturns, due to the high proportion of fixed costs.
Committed costs are typically fixed costs that management has a long-term responsibility to pay, such as rent on a long-term lease and depreciation on an asset with an extended life.
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.
A financial statement that presents income using the marginal costing layout, emphasizing the distinction between variable and fixed costs, and aids in understanding the profitability of products based on contribution margins.
In cost accounting, Contribution Profit Margin is the excess of sales price over variable costs. It provides an amount to offset fixed costs, thus contributing to gross profit.
Cost absorption involves assigning all costs, both fixed and variable, to the product or service being produced or delivered.
Cost Behaviour refers to the relationship and changes in total costs as a response to changes in activity levels within an organization, playing a crucial role in breakeven analysis and decision-making techniques.
A Cost Function is a formula or equation that represents how specific costs behave when visualized on a graph. It typically depicts total cost as the sum of fixed costs and variable costs.
Cost-plus transfer prices are set by cost-plus pricing, which includes a mark-up to provide a profit for the supplying division. This method incorporates variable costs and fixed costs for the purpose of setting a transfer price that includes a profit margin.
Cost-Volume-Profit (CVP) Analysis helps businesses understand how changes in costs and volume affect a company's operating income and net income, providing critical insights for decision-making in financial planning and strategy.
In management accounting, the principle that the management of an organization is likely to need different information, and thus different costs, for various activities it carries out, especially when making decisions.
Direct costing, also known as marginal costing, is a crucial accounting technique that outlines the variable costs incurred in the production process. This method focuses on the costs directly tied to the production of goods and services.
An inventory decision model used to calculate the optimum amount to order, balancing the fixed costs of ordering and receiving against the carrying cost of inventory and sales. Utilized in both manufacturing and retail inventory management.
A fixed charge is the portion of an expense that remains constant, regardless of the amount of a commodity or service used or consumed.
Full costing, also known as absorption costing, is an accounting method where all fixed and variable manufacturing costs are considered to be product costs.
Hard manufacturing involves the use of fixed production equipment designed for large production runs of similar items, representing significant fixed costs and limited adaptability to new products.
Ideal capacity refers to the largest volume of output a facility can achieve if it maintained continuous operation at optimum efficiency without any losses, including those deemed normal or unavoidable.
A characteristic of a production process that becomes more efficient at larger levels of output. The marginal cost of producing each additional unit decreases, often due to high fixed costs relative to marginal costs.
Inventoriable costs refer to the costs that can be included in the valuation of stocks, work in progress, or inventories. These costs include both fixed and variable production costs up to the stage of production reached, but exclude selling and distribution costs.
A linear cost function captures cost behavior that, when plotted on a graph against activity levels, results in a straight line. This function simplifies the relationship between costs and activity levels, essential for cost estimation and budgeting in business.
Marginal Cost Pricing sets product prices based solely on the product's marginal costs. It is typically employed in exceptional situations where competition is intense.
A costing and decision-making technique that charges only the marginal costs to the cost units and treats the fixed costs as a lump sum, deducting from the total contribution to obtain the profit or loss for the period.
Operating Leverage is a financial concept that measures the proportion of fixed costs in a company's cost structure and how these fixed costs amplify the effect of changes in sales on operating income.
Overhead costs refer to ongoing business expenses not directly attributed to creating a product or service. These costs help businesses operate and maintain their daily functions.
Period costs are expenses that are incurred over a specific period of time and are not directly tied to a specific product or production activity. These costs are typically fixed, such as rent, insurance, and business rates.
A PV chart graphically displays the relationship between profits, losses, and different levels of business activity, highlighting the breakeven point and fixed costs.
A Profit-Volume (PV) Chart, also known as a Profit-Volume graph, visually represents the relationship between a company's profits and its sales volume. It provides valuable insights into the break-even point, the margin of safety, and the dynamics between fixed and variable costs, aiding in decision-making and strategic planning.
The relevant range is the range of activity levels within which valid conclusions about cost behaviors and break-even points can be drawn from linear cost functions. Outside this range, the assumptions of linear relationships between costs and revenue may not hold true.
Repetitive manufacturing is a method of production where the same products are continually and repetitiously manufactured. This method is ideal for mass production and supports hard manufacturing with significant fixed cost investments. Products such as appliances and automobiles are typically produced this way.
The Scale Effect refers to the cost advantages that a business obtains due to the size, output, or scale of its operation. Primarily, the cost per unit of output generally decreases with increasing scale as fixed costs are spread out over more units of output.
Semi-variable costs, also known as mixed costs, are costs that contain both fixed and variable components. They change in response to changes in volume but by less than a proportionate amount.
The shutdown point represents the output price level at which a firm's revenues exactly cover fixed costs. Below this price level, a firm's losses would be minimized by ceasing operations as continued production would generate greater losses.
Total cost refers to the sum of all costs incurred by a business in the production of goods or services, combining both fixed and variable costs.
Total cost represents the comprehensive expenses incurred by a firm to produce a specific level of output, encompassing both fixed and variable costs.
Total cost of production is a term used to refer to the overall expense incurred by a company to manufacture a product or provide a service. It includes both fixed and variable costs.
The sum of all expenditure incurred during an accounting period within an organization, on a product, or on a process. Total costs are often analyzed into fixed costs and variable costs.
Expenditure incurred by an organization expressed as a rate per unit of production or sales. While the unit cost is fundamental for understanding profitability, it can be challenging to make valid comparisons between organizations due to arbitrary allocation of fixed overhead costs.
Variable costs are expenses that change in proportion to the level of activity or volume of production a business undertakes.
Variable costs, or variable expenses, are business costs that fluctuate in direct proportion to changes in production or sales volume. They contrast with fixed costs, which remain constant regardless of production levels.
