Introduction to costing terms

• Before we get started with the actual costing process you need to get acquainted with various cost accounting terms and costing
• It is important to note that this is not meant to be a glossary of all the terms in cost accounting
• This is merely a list to get you started additional terms will be introduced whenever appropriate
• It is important to define what a cost is even if that might seem obvious
• Cost in management accounting refers to the monetary valuation of :
  1. Effort (labour)
  2. materials consumed (materials cost)
  3. resources consumed
  4. Time and utilities consued
  5. risks incurred and
  6. Opportunities foregone (opportunity cost)
• in the production and delivery of a product (i.e. good or service)
• Costing meanwhile refers to the system of computing cost of production or of running a business, by allocating expenditure to various stages of production or to different operations of a firm
• Costing involves two main processes:
  1. Allocating costs to various cost centres
  2. Apportioning costs to various cost centres
• Both processes will be explained in detail
• Cost coding is a method of grouping individual costs based on their nature or function
• Codes usually consist of numeric characters with a account title
• For example, costs related with assembling labour in a factory can be classified under Labour Expenses with a cost code such as L0003
• It is important to note that like all things involved with Management Accounting it is entirely up to management how they want to code their costs although there are conventions
• Cost centre  is a defined area, machine, or person to whom direct and indirect costs are allocated
• A cost centre is a production or service location, function, activity or item of equipment whose costs are identified and recorded
• For a food processor such as Heinz cost centres might include canning department, labelling department, selling and distribution department, marketing department, administration department, canteen etc
• In an Accounting firm cost centres might include the Auditing department, Tax department and Estate department
• A revenue centre is a part of the organisation that earns sales revenue
• It is similar to a cost centre, but only revenues, and not costs, are recorded
• Typically these include the selling departments of the organisation
• A profit centre is a part of the business for which both the costs incurred and the revenues earned are identified
• Profit centres have both revenue and costs-Profit= Revenues-costs
• Cost unit-unit of product or service for which cost is computed for example kilograms, litres etc
• Opportunity cost-is the cost of foregoing the next best alternative i.e. the cost of giving up a choice and pursuing the alternative for example when a businesses buys something instead of making it itself it might give up flexibility (flexibility becomes the opportunity of making the purchase)

NB The terms cost accounting and management accounting while different are often used interchangeably in the real world. To learn their purported difference please go to the introduction here. We will follow real life practice where little effort will be made to distinguish between the two from hereon.

To access more topics go the ZIMSEC Advanced Level Accounting page

To access more topics go to the Cambridge AS/A level page