Absorbed overhead (also known as applied overhead or recovered overhead) refers to the amount of overhead costs allocated to a specific production process or cost unit within an organization during an accounting period, using the technique of absorption costing.
Absorption costing is a methodology used to allocate all manufacturing costs to the production units. It is generally used in traditional costing systems.
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.
A graphical depiction of the average cost per unit to produce a product for a given level of output based on current technology and scale employed by existing firms.
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.
The costs incurred in a production process as a result of which raw material is converted into finished goods. The conversion costs usually include direct labor and manufacturing overheads but exclude the costs of direct material itself.
Cost Records refer to documents that provide evidence of the prices at which investments were purchased or the costs incurred in producing goods, providing services, or supporting activities. These records are essential for calculating capital gains and substantiating financial performance.
A predetermined level of cost expected to be incurred by a specific cost item in the supply, production, or operation of a service, product, process, or cost centre. Cost standards are often applied to performance standards in order to calculate standard overhead costs.
A method to establish the selling price of a product or service by estimating the total cost and adding a percentage mark-up to achieve a profitable price.
A type of inflation caused by increasing prices, typically resulting from rising costs of production inputs such as raw materials and wages.
The direct cost of sales, also known as the prime cost, refers to the aggregate expenses directly tied to the production of a good or service, encompassing direct materials, direct labor, and direct expenses, while excluding overhead costs.
Direct expenses are expenditures that are directly attributable to the production of a particular cost unit, excluding direct labor and materials.
Direct Labour refers to the labor involved in the production of goods or services, specifically attributable to specific cost units such as products, services, or machinery usages.
The Direct Labour Total Cost Variance is a key metric used in cost accounting to analyze the difference between the actual cost of direct labour and the standard cost allocated for the production of goods.
Direct material refers to the cost of material that can be specifically identified with the production of a product, such as wood and nails in furniture manufacturing. It does not include materials used indirectly in the production process, like gasoline for power saws used to fell trees for lumber.
Direct materials are those materials that are directly incorporated into the final product or cost unit of an organization. These raw materials are integral to the manufacturing process and can be easily traced back to the finished product.
An accounting term used in standard costing to measure the difference between the actual cost of direct materials and the standard cost, identifying favorable or adverse variances that affect budgeted profit.
A measurement that combines the direct materials price variance and the direct materials usage variance to compare actual and standard costs of direct materials consumed in actual production.
Direct Materials Yield Variance, also known as Direct Materials Quantity Variance, is a fundamental concept in standard costing systems. It assesses the efficiency in the use of direct materials by comparing the standard quantity allowed for production to the actual quantity used, then valuing this difference at standard prices.
Direct wages refer to the payments made to laborers who are directly involved in the production process of a good or service. These wages are part of the direct labor costs and play a crucial role in cost accounting and financial analysis.
An operator in an organization whose time is spent working on the product or cost unit to such an extent that the operator's time is traceable to the product as a direct cost.
Economies of scale refer to the cost advantages that a business obtains due to expansion, which result in the reduction of per-unit costs as the scale of operation increases.
Effective Units, a concept closely linked with Equivalent Units, are used in cost accounting to determine the cost per unit in a production process, especially when dealing with incomplete goods. The aim is to assign accurate costs to partially completed items.
Factory overhead, also known as indirect manufacturing costs or factory burden, includes the expenses associated with manufacturing that cannot be directly traced to a specific product. Examples include factory rent, maintenance wages, and general machinery depreciation.
A fixed cost (also known as a fixed expense) is an item of expenditure that remains unchanged in total, irrespective of changes in the levels of production or sales. Examples include business rates, rent, and some salaries.
Fixed production overhead consists of factory costs that remain constant regardless of changes in the level of production or sales. Understanding these overheads is crucial for accurate financial and managerial accounting.
Personnel not directly engaged in the production of a product or cost unit manufactured by an organization. Examples of indirect labour include maintenance personnel, cleaning staff, and senior supervisors, such as foremen.
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.
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.
Inventory Valuation involves determining the monetary worth of raw materials, work-in-progress, and finished goods, as prescribed by specific accounting standards. It plays a critical role in both financial and management accounting.
A job cost sheet is a detailed record of the budgeted or actual costs of materials and labor required to produce a specific product. It plays a critical role in job costing systems used primarily in manufacturing.
Labor intensive refers to industries or companies where labor costs are a more significant component of total costs compared to capital expenditures.
Labour costs refer to the total expenditure on wages paid to workers who are directly or indirectly involved in the production of a product, service, or cost unit. This includes both direct and indirect labour costs.
The Law of Increasing Costs states that as the productivity of a factor of production decreases due to increasing production, the cost of successive units produced must increase.
Manufacturing Overhead, also known as Production Overhead, includes all the indirect costs incurred in the production process that cannot be directly traced to the product or cost unit. These costs cover a wide range of expenses such as depreciation of machinery, factory rent, maintenance expenses, and utilities.
Marginal cost represents the cost of producing one additional unit of a product. It includes both direct costs and variable overhead costs associated with the production process.
A marginal producer in an industry is an individual producer who remains barely profitable at current levels of price and production.
An operating statement is a financial report provided to management, detailing the performance of specific areas of operation over a selected budget period. It includes production levels, costs incurred, and revenues generated, and is compared with budgeted amounts and previous performances.
Overhead absorption, also known as overhead allocation, involves distributing indirect costs to different cost units or products. It's a crucial part of cost accounting, ensuring all production costs are appropriately assigned.
Prime cost is a crucial accounting term reflecting the direct costs of production, typically including direct materials and direct labor expenses.
Process costing is a method of cost accounting used where production is continuous, and the cost per unit is derived by spreading production costs equally across all units produced in a specific time period.
A critical component of an organization's operating budget, the production budget outlines the volumes and costs associated with producing goods within a set period, ensuring effective budgetary control.
A pivotal area within an organization where production activities are conducted, focusing on tracking and managing production-related expenses.
Production overhead, also known as manufacturing overhead, refers to the indirect costs associated with manufacturing a product. These costs are not directly tied to the production process but are necessary expenses for running a manufacturing operation.
Production Profit/Loss refers to the financial gain or loss that results from manufacturing activities. It equals the difference between total production revenue and total production costs.
An expression that indicates increasing difficulty in maintaining the same amount or rate of profit due to reduced sales, lower prices, rising production costs, financing costs, administrative expenses, or taxes.
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.
A standard cost for the fixed and/or variable overhead of an operation derived from the standard time allowed for the performance of the operation or the production of a product and the standard overhead absorption rate per unit of time for that operation or product.
In accounting, stores oncost refers to the indirect costs or overheads associated with handling and storing materials used in production. These costs are not directly attributed to the cost of the raw materials themselves but are necessary for the overall production process.
Total cost represents the comprehensive expenses incurred by a firm to produce a specific level of output, encompassing both fixed 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.
In cost accounting, unit-level activities are those that are performed each time a unit is produced. These include tasks directly correlated with the production volume, such as machine operation and direct labor.
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.
Wage-push inflation is an inflationary situation in which increasing wages are not offset by rising productivity, leading to higher production costs and, consequently, increased prices for goods and services.
