A cost object is anything for which we are trying to ascertain the cost.

Examples of cost objects include: n A unit of product (eg a car) n A unit of service (eg a valet service of a car) n A department or function (eg the accounts department) n A project (eg the installation of a new computer system) n A new product or service (eg to enable the cost of development to be identified) A cost unit is the basic measure of product or service for which costs are determined. A direct cost is a cost that can be traced in full to the cost unit. Indirect cost (or overhead): A cost that is incurred which cannot be traced directly and in full to the cost unit. A fixed cost is a cost that, within a relevant range of activity levels, is not affected by increases or decreases in the level of activity. A variable cost is a cost that increases or decreases as the level of activity increases or decreases. Semi-variable, semi-fixed or mixed costs are costs that are part-fixed and part-variable and are therefore partly affected by changes in the level of activity. The relevant range is the range of activity levels within which assumed cost behaviour patterns occur. Responsibility accounting is a system of accounting that segregates revenue and costs into areas of personal responsibility in order to monitor and assess the performance of each part of an organisation. A responsibility centre is a department or function whose performance is the direct responsibility of a specific manager. A controllable cost is a cost that can be influenced by management decisions and actions. An uncontrollable cost is a cost that cannot be affected by management within a given time span. Standard costing is defined by CIMA as a control technique that reports variances by comparing actual costs to pre-set standards so facilitating action through management by exception. Standard costing (for control) therefore involves the following. n The establishment of predetermined estimates of the costs of products or services n The collection of actual costs n The comparison of the actual costs with the predetermined estimates. Management by exception is defined by CIMA as the practice of concentrating on activities that require attention and ignoring those which appear to be conforming to expectations. Typically standard cost variances or variances from budget are used to identify those activities that require attention.

A cost variance is defined by CIMA as the difference between a planned, budgeted, or standard cost and the actual cost incurred. The same comparisons may be made for revenues. Variance analysis is defined as the evaluation of performance by means of variances, whose timely reporting should maximise the opportunity for managerial action. The material total variance measures the difference between the standard material cost of the output produced and the actual material cost incurred (CIMA). The material price variance This is the difference between the standard cost and the actual cost for the actual quantity of material used or purchased. In other words, it is the difference between what the material did cost and what it should have cost. The material usage variance This is the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used, valued at the standard price per unit of material. In other words, it is the difference between how much material should have been used and how much material was used, valued at standard price. The labour total variance measures the difference between the standard labour cost of the output produced and the actual labour cost incurred. Variable production overhead total variance measures the difference between the variable production overhead that should be used for actual output and the variable production overhead actually used. Variable production overhead expenditure variance measures the actual cost of any change from the standard variable overhead rate per hour. Variable production overhead efficiency variance is the standard variable production overhead cost of any change from the standard level of efficiency. The margin of safety is the difference in units between the budgeted or expected sales volume and the breakeven sales volume. It is sometimes expressed as a percentage of the budgeted sales volume. A limiting factor or key factor is anything which limits the activity of an entity. An entity seeks to optimize the benefit it obtains from the limiting factor. Examples are a shortage of supply of a resource or a restriction on sales demand at a particular price. Payback is defined by CIMA as The time required for the cash inflows from a capital investment project to equal the initial cash outflow(s).