dossier
Know Your Costs
The terminology of costs in itself can be daunting. Many different flavours of cost measurement exist, depending on views of
cost by product, business unit, project, process, or customer. Here are some basic cost definitions and terms that managers
need to be aware of:
Measure What it means
absorption costing includes both fixed and variable overheads in product costs
activity-based costing (ABC) costs are assigned to activities, then allocated to products consuming the activities
actual cost based on historical data, including storage and delivery
average/unit cost total cost of producing a quantity of product divided by number of units produced
avoidable cost costs no longer incurred if company discontinues an activity, product
carrying cost cost of holding stock from purchase to use
controllable cost cost that is substantially controlled or influenced by a particular individual
cost allocation process of assigning costs, usually overheads, by formula eg volume, resource use
cost centre a responsibility centre whose manager is accountable for its costs
cost driver item(s) that have the highest bearing on, or causing an activitys cost
cost object critical item, activity or process whose costs need to be separately measured
cost of capital cost of acquiring resources either through debt or issuing stock
cost of goods sold total cost of finished goods actually sold in a particular period
cost pool collection of costs for different cost objects
cost-plus pricing where price equals cost plus percentage mark-up
cost structure relative proportion of a products, firms variable vs fixed costs
differential cost difference in a cost item under two decision alternatives
direct cost cost traceable to a product, dept, usually direct labour and materials
discretionary cost not essential for operations, but critical to maintain profitability, growth
distribution cost cost of storing and transporting finished goods; includes salaries, selling costs
economic order quantity the order size that minimises inventory holding and ordering costs
engineered cost cost that results from a definitive physical relationship with an activity
experience curve graph showing how costs decline as cumulative production output increases
external failure cost incurred because defective products have been sold
fixed cost does not change in total as activity, volume changes
incremental cost amount by which the cost of one action exceeds that of another
indirect cost cost that cannot be traced to one product, department, process
internal failure cost cost of correcting defects found prior to sale
joint cost incurred in a joint production process before products are separated
kaizen costing process of continual cost reduction during the manufacturing phase of a product
marginal cost extra cost of producing one additional unit
mixed cost cost with both fixed and variable component
normal costing allocates to products actual direct labour, material, and overheads by formula
opportunity cost potential benefit given up when one action is chosen above another
prevention costs costs of preventing defective products
prime costs costs of direct material and direct labour
product cost cost of a product until it is sold, at which point it becomes an expense
product life-cycle costing accumulation of costs from product concept to discontinuance
standard cost pre-determined estimate of producing one unit; benchmark for actual cost
step-down method where service dept costs allocated first to service depts, then to production depts
step cost fixed or variable, but move in jumps, usually large for fixed, small for variable
sunk cost costs incurred in the past and unalterable by current or future decisions
target cost projected long-term product cost; target selling price less target profit
total cost curve graphs relationship between total cost and total quantity produced and sold
transfer price price at which products, services are transferred between a firms divisions
variable cost changes in direct proportion with either inputs or outputs
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Bulletpoint - March 2000
