Key Terms

Question	Answer
Costing system	The system that an organisation has developed to collect information about costs and income so that it can be used to help with decision making, planning and control.
Management accounting	The area of accounting that includes costing; it concentrates on providing internal information about the future in a form that is useful; it has no externally set rules that must be followed.
Financial accounting	The area of accounting that includes bookkeeping; it concentrates on providing historic information that can be used internally and also provided to external parties.
Budget	A future plan for an organisation, showing all the detail in financial terms; it is usually made up of various individual budgets.
Cost classification by element	Grouping costs together according to the type of cost based on three categories - materials, labour and expenses.
Cost classification by nature	Grouping costs together according to whether they are direct costs or indirect costs.
Direct costs	Costs that are directly identified with the units of output.
Prime cost	A term relating to the total of direct costs; it is often used to describe the total direct cost for a unit of output.
Indirect costs	Costs that are not directly identified with the units of output; these costs are divided into production and non production costs in a manufacturing business.
Cost of production	A term relating to the total of direct costs and indirect production costs.
Cost centre	A section of an organisation to which costs can be charged. The number and type of cost centre would depend on the requirements of the organisation.
Profit centres	A section of an organisation to which costs can be charged, income can be identified and profits can be calculated.
Investment centre	A section of an organisation to which costs can be charged, income can be identified and investment can be measured.
Coding system	A way of using unique headings to analyse data. They can also be used to place data in logical order if required.
Numeric code	A code made up entirely of numbers.
Alphabetic code	A code made up entirely of letters of the alphabet.
Alpha-numeric code	A code made up of a combination of numbers and letters.
Absorption	Means of incorporating indirect costs into costs of units of output.
Absorption base	Chosen method of absorption used by an organisation.
Overhead absorption rate	The rate used to absorb overheads into products or services.
Units of output method	A method of absorption based on dividing budgeted overheads by budgeted number of units to provide an overhead absorption rate per unit.
Direct labour hours method	A method of absorption based on dividing budgeted overheads by budgeted direct labour hours to provide an overhead absorption rate per direct labour hour.
Machine hours method	A method of absorption based on dividing budgeted overheads by budgeted machine hours to provide an overhead absorption rate per machine hour.
Cost behaviour	The way that costs alter with changes in the level of output or activity.
Fixed costs	A cost that does not alter in total when the level of output or activity changes.
Variable costs	A cost that changes in proportion to the level of output or activity.
Semi-variable costs	A cost that contains both a fixed element and a variable element.
High-low method	A technique for calculating the variable and fixed costs that comprise a semi-variable cost by analysing the total costs at two activity levels.
Raw materials	The materials bought by manufacturing organisations and used to manufacture the finished products.
Work-in-progress	The name given to partly-completed items in a manufacturing organisation.
Finished goods	The items that have been manufactured and are ready for sale.
First in First Out (FIFO)	A method of inventory valuation that assumes goods will be used up in the order that they are acquired. This means that the remaining balance will be valued based on the prices of more recent purchases.
Last in First Out (LIFO)	This method of inventory valuation assumes that the most recently acquired inventory will be used first, leaving the earlier acquisitions to make up the value of the remaining balance. This does not have to correspond with the actual order of usage.
Average cost (AVCO)	This inventory valuation method involves calculating a new weighted average cost of goods each time that a new purchase is made, and using this valuation for subsequent issues and balances until further purchases are made.
Manufacturing account	This cost statement is produced at the end of a period to summarise costs under various categories.
Direct materials	This is calculated as the total of opening inventory of raw materials, plus materials purchased, minus closing inventory of raw materials.
Direct cost	The total of direct costs in a manufacturing account it is calculated by adding direct materials used in a manufacture to direct labour.
Manufacturing cost	A subtotal made up of the total of direct cost and manufacturing overheads.
Cost of goods manufactured	This subtotal is the production costs of goods that have been completed and is made up of manufacturing cost adjusted for inventories of work-in-progress.
Cost of goods sold	A total based on the factory cost of goods manufactured which has been adjusted for inventories of finished goods.
Time rate	The method of remuneration when payment is on the basis of time spent at work; it can be an hourly rate or based on a longer time period.
Basic rate	A time rate that is applied to the normal contracted work time, and is usually an hourly rate.
Overtime rate	The rate paid for time worked in excess of the normal contracted time; it is usually at a higher rate than basic rate.
Piecework	A payment system when the employee is paid for the work carried out; this does not take any account of the time taken.
Bonus system	A system used in conjunction
Budget	A financial planning document that is prepared in advance, and can be used to help monitor and control costs.
Variances	The difference between the actual data and the budgeted data.
Adverse variances	In a performance report when the actual income is lower than budget. OR In a performance report when the actual cost is higher than budget.
Favourable variances	In a performance report when the actual cost is lower than budget. OR In a performance report when the actual income is higher than budget.
Significant variance	A variance that is brought to the managers attention for further investigation due to either its high monetary value or the high percentage of the variance from the budget data.

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	Created by Katie Start about 8 years ago