Absorption costing, also known as full costing, encompasses an accounting process where all manufacturing costs, both fixed and variable, are absorbed by the product. This method assigns a portion of fixed overhead costs to each unit produced, resulting in a more comprehensive understanding of product costs.
Average Cost (also known as Weighted-Average Cost) is a method of determining the cost per unit by dividing total costs by the total output. This method includes recalculating the unit value for raw materials or finished goods after each new consignment.
Avoidable costs are expenses that can be eliminated if a particular decision or course of action is taken, such as ceasing production of a specific product. They are crucial in determining the financial impact of business decisions.
A cost or income standard set in standard costing to form the basis on which other standards are set. It is a foundational metric from which other variances and standards can be derived.
Breakeven Analysis, also known as Cost-Volume-Profit (CVP) Analysis, is a managerial accounting technique in which costs are analyzed according to their fixed or variable nature and compared to sales revenue to determine the level of sales or production at which the business neither makes a profit nor incurs a loss.
A breakeven chart (or breakeven graph) is a visual tool used to depict the relationship between an organization's total costs—comprising fixed and variable costs—and its sales revenue across different levels of activity. The intersection point of these curves shows the breakeven point, where total costs equal total revenue.
The breakeven point is the level of production, sales volume, percentage of capacity, or sales revenue at which an organization makes neither a profit nor a loss. This critical financial metric helps businesses understand when they will start to become profitable.
Budget Cost Allowance refers to the amount of budgeted expenditure that a cost centre or budget centre is allowed to spend in relation to its budget, with consideration to the actual level of activity achieved during the budget period. It distinguishes between fixed and variable costs to adjust expenditure limits.
A financial statement that presents income using the marginal costing layout, emphasizing the distinction between variable and fixed costs, and aids in understanding the profitability of products based on contribution margins.
In cost accounting, Contribution Profit Margin is the excess of sales price over variable costs. It provides an amount to offset fixed costs, thus contributing to gross profit.
Cost absorption involves assigning all costs, both fixed and variable, to the product or service being produced or delivered.
Cost Behaviour refers to the relationship and changes in total costs as a response to changes in activity levels within an organization, playing a crucial role in breakeven analysis and decision-making techniques.
A Cost Function is a formula or equation that represents how specific costs behave when visualized on a graph. It typically depicts total cost as the sum of fixed costs and variable costs.
Cost-plus transfer prices are set by cost-plus pricing, which includes a mark-up to provide a profit for the supplying division. This method incorporates variable costs and fixed costs for the purpose of setting a transfer price that includes a profit margin.
Cost-Volume-Profit (CVP) Analysis helps businesses understand how changes in costs and volume affect a company's operating income and net income, providing critical insights for decision-making in financial planning and strategy.
A curvilinear cost function represents any cost relationship where the cost does not change proportionally with the level of activity. This type of cost function forms a curved line when plotted on a graph.
In management accounting, the principle that the management of an organization is likely to need different information, and thus different costs, for various activities it carries out, especially when making decisions.
Direct costing, also known as marginal costing, is a crucial accounting technique that outlines the variable costs incurred in the production process. This method focuses on the costs directly tied to the production of goods and services.
Flexed Budget Allowance refers to the budgeted expenditure level for each of the variable cost items adjusted to the level of activity actually achieved. This concept is crucial for adjusting budgetary figures based on actual performance.
Full costing, also known as absorption costing, is an accounting method where all fixed and variable manufacturing costs are considered to be product costs.
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.
A linear cost function captures cost behavior that, when plotted on a graph against activity levels, results in a straight line. This function simplifies the relationship between costs and activity levels, essential for cost estimation and budgeting in business.
Net Contribution refers to the excess of the selling price over variable costs per unit, signifying the residual positive effect from an action taken. It's a critical metric in assessing the profitability and efficiency of various business operations and decisions.
Overhead costs refer to ongoing business expenses not directly attributed to creating a product or service. These costs help businesses operate and maintain their daily functions.
The Production-Volume Ratio (PV Ratio), also known as the Contribution Margin Ratio, is a performance metric that measures the proportion of sales revenue that exceeds variable costs. It's an essential indicator in assessing the profitability of products or services in cost-volume-profit analysis.
A Profit-Volume (PV) Chart, also known as a Profit-Volume graph, visually represents the relationship between a company's profits and its sales volume. It provides valuable insights into the break-even point, the margin of safety, and the dynamics between fixed and variable costs, aiding in decision-making and strategic planning.
The relevant range is the range of activity levels within which valid conclusions about cost behaviors and break-even points can be drawn from linear cost functions. Outside this range, the assumptions of linear relationships between costs and revenue may not hold true.
The Scale Effect refers to the cost advantages that a business obtains due to the size, output, or scale of its operation. Primarily, the cost per unit of output generally decreases with increasing scale as fixed costs are spread out over more units of output.
Semi-variable costs, also known as mixed costs, are costs that contain both fixed and variable components. They change in response to changes in volume but by less than a proportionate amount.
The shutdown point represents the output price level at which a firm's revenues exactly cover fixed costs. Below this price level, a firm's losses would be minimized by ceasing operations as continued production would generate greater losses.
Under a standard costing system, the standard cost allowance refers to the level of expenditure permitted for variable costs, based on actual levels of activity. It helps in budgeting and controlling costs efficiently.
Total cost refers to the sum of all costs incurred by a business in the production of goods or services, combining both fixed and variable costs.
Total cost represents the comprehensive expenses incurred by a firm to produce a specific level of output, encompassing both fixed and variable costs.
Total cost of production is a term used to refer to the overall expense incurred by a company to manufacture a product or provide a service. It includes both fixed and variable costs.
The sum of all expenditure incurred during an accounting period within an organization, on a product, or on a process. Total costs are often analyzed into fixed costs 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.
The Variable Cost Ratio measures the ratio of variable costs to sales revenue, expressed as a percentage. It provides insight into the relationship between production costs and sales, crucial for cost management and pricing strategies.
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.
