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cost accounting

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Definition of cost accounting

Cost Accounting Image 1

cost accounting

a discipline that focuses on techniques or
methods for determining the cost of a project, process, or
thing through direct measurement, arbitrary assignment, or
systematic and rational allocation

Related Terms:

Cost Accounting Standards Board (CASB)

a body established by Congress in 1970 to promulgate cost accounting
standards for defense contractors and federal agencies; disbanded
in 1980 and reestablished in 1988; it previously issued
pronouncements still carry the weight of law for those
organizations within its jurisdiction

backflush costing

a streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances
from standard


see cost accounting Standards Board

management accounting

a discipline that includes almost
all manipulations of financial information for use by managers
in performing their organizational functions and in
assuring the proper use and handling of an entity’s resources;
it includes the discipline of cost accounting

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Accounting exposure

The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.

Accounting earnings

Earnings of a firm as reported on its income statement.

Cost Accounting Image 2

Accounting insolvency

Total liabilities exceed total assets. A firm with a negative net worth is insolvent on
the books.

Accounting liquidity

The ease and quickness with which assets can be converted to cash.

Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs

The incremental costs of having an agent make decisions for a principal.

All-in cost

Total costs, explicit and implicit.

Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

Carring costs

costs that increase with increases in the level of investment in current assets.

Cost Accounting Image 3

Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.

Cost of capital

The required return for a capital budgeting project.

Cost of carry

Related: Net financing cost

Cost of funds

Interest rate associated with borrowing money.

Cost of lease financing

A lease's internal rate of return.

Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.

Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.

Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing

Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).

Fixed cost

A cost that is fixed in total for a given period of time and for given production levels.

Cost Accounting Image 4

Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.

Generally Accepted Accounting Principals (GAAP)

A technical accounting term that encompasses the
conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.

Net financing cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing
the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than
the financing cost; negative carry means that the financing cost exceeds the yield earned.

Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in
comparable financial securities.

Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.

Price impact costs

Related: market impact costs

Purchase accounting

Method of accounting for a merger in which the acquirer is treated as having purchased
the assets and assumed liabilities of the acquiree, which are all written up or down to their respective fair
market values, the difference between the purchase price and the net assets acquired being attributed to goodwill.

Regulatory accounting procedures

accounting principals required by the FHLB that allow S&Ls to elect
annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the
asset sold.

Replacement cost

cost to replace a firm's assets.

Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.

Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.

Shortage cost

costs that fall with increases in the level of investment in current assets.

Statement of Financial Accounting Standards No. 8

This is a currency translation standard previously in
use by U.S. accounting firms. See: Statement of accounting Standards No. 52.

Statement of Financial Accounting Standards No. 52

This is the currency translation standard currently
used by U.S. firms. It mandates the use of the current rate method. See: Statement of Financial accounting
Standards No. 8.

Sunk costs

costs that have been incurred and cannot be reversed.

Trading costs

costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.

Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.

True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.

Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

Weighted average cost of capital

Expected return on a portfolio of all the firm's securities. Used as a hurdle
rate for capital investment.

Cost basis

An asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.

Cost of goods sold

The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
materials, components, labor and other things that went into producing an item.

MACRS (Modified Accelerated Cost Recovery System)

A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).

Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.


A collection of systems and processes used to record, report and interpret business transactions.

Accounting equation

The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.

Accounting period

The period of time for which financial statements are produced – see also financial year.

Accounting rate of return (ARR)

A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.

Accounting system

A set of accounts that summarize the transactions of a business that have been recorded on source documents.

Accruals accounting

A method of accounting in which profit is calculated as the difference between income when it is earned and expenses when they are incurred.

Activity-based costing

A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.

Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.

Cash accounting

A method of accounting in which profit is calculated as the difference between income
when it is received and expenses when they are paid.

Cash cost

The amount of cash expended.


A resource sacrificed or forgone to achieve a specific objective (Horngren et al.), defined
typically in monetary terms.

Cost behaviour

The idea that fixed costs and variable costs react differently to changes in the volume of
products/services produced.

Cost centre

A division or unit of an organization that is responsible for controlling costs.

Cost control

The process of either reducing costs while maintaining the same level of productivity or maintaining costs while increasing productivity.

Cost driver

The most significant cause of the cost of an activity, a measure of the demand for an activity
by each product/service enabling the cost of activities to be assigned from cost pools to products/services.

Cost object

Anything for which a measurement of cost is required – inputs, processes, outputs or responsibility centres.

Cost of capital

The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
cost of equity and debt weighted by the mix of equity and debt.

Cost of goods sold

See cost of sales.

Cost of manufacture

The cost of goods manufactured for subsequent sale.

Cost of quality

The difference between the actual costs of production, selling and service and the costs that would be incurred if there were no failures during production or usage of products or services.

Cost of sales

The manufacture or purchase price of goods sold in a period or the cost of providing a service.

Cost-plus pricing

A method of pricing in which a mark-up is added to the total product/service cost.

Cost pool

The costs of (cross-functional) business processes, irrespective of the organizational structure of the business.

Cost–volume–profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.

Direct costs

costs that are readily traceable to particular products or services.

Financial accounting

The production of financial statements, primarily for those interested parties who are external to the business.

Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.

Full cost

The cost of a product/service that includes an allocation of all the (production and
non-production) costs of the business.

Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.

Job costing

A method of accounting that accumulates the costs of a product/service that is produced either
customized to meet a customer’s specification or in a batch of identical product/services.

Labour oncost

The non-salary or wage costs that follow from the payment of salaries or wages, e.g. National
Insurance and pension contributions.

Lifecycle costing

An approach to costing that estimates and accumulates the costs of a product/service over
its entire lifecycle, i.e. from inception to abandonment.

Management accounting

The production of financial and non-financial information used in planning for the future; making decisions about products, services, prices and what costs to incur; and ensuring that plans are implemented and achieved.

Marginal cost

The cost of producing one extra unit.

Opportunity cost

The lost opportunity of not doing something, which may be financial or non-financial, e.g. time.

Period costs

The costs that relate to a period of time.

Prime cost

The total of all direct costs.

Process costing

A method of costing for continuous manufacture in which costs for an accounting compared are compared with production for the same period to determine a cost per unit produced.

Product cost

The cost of goods or services produced.

Relevant cost

The cost that is relevant to a particular decision – future, incremental cash flows.

Semi-fixed costs

costs that are constant within a defined level of activity but that can increase or decrease when
activity reaches upper and lower levels.

Semi-variable costs

costs that have both fixed and variable components.

Standard costs

A budget cost for materials and labour used for decision-making, usually expressed as a per unit cost that is applied to standard quantities from a bill of materials and to standard times from a

Strategic management accounting

The provision and analysis of management accounting data about a business and its competitors, which is of use in the development and monitoring of strategy (Simmonds).







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