Learn useful terms used in Cost and Management Accounting

The aim of this article is to place all useful terms used in cost and management accounting with explanations at one point. This list is not the end but gives our audience an amazing opportunity to read and understand such important terminologies in one place. All these terms are repeatedly used throughout the syllabus. Some of them are used interchangeably, so this article helps readers to remove either confusion if they have any.

Learn useful terms used in Cost and Management Accounting Before go into detail.

Important Cost Terminologies

1. Cost Unit or Product Cost
2. Cost Centre
3. Revenue Center
4. Profit Center
5. Investment Center
6. Irrelevant Cost-Not change while decision changes
7. Sunk Cost
8. Product Cost(used at the time of inventory costing-cost of cost unit)
9. Period Cost (Charge to profit and loss account but not becomes the part of product cost)
10. Opportunity Cost or implicit cost
11. Relevant Cost
12. Historical Cost (Consider the date of transaction) or explicit cost
13. Standard Cost (Predetermined Cost)
14. Implicit Cost (Opportunity Cost)
15. Explicit Cost (Physical Payment actually incurred like historical cost)
16. Differential Cost (Also known As Incremental Cost: include all cost behavior)
17. Marginal Cost
18. Cost Accumulation

1. Cost Unit or Product Cost

In simple words, all kinds of costs incurred producing the product or service.
a. Direct Material
b. Indirect Material Remember a+b=primary cost
c. Factory Overhead also is known as Manufacturing cost,
Note: Direct Material + Indirect Material + FOH = Factory Cost
Examples: Chair, Ball Point, etc.

2. Cost Center

The place or location where all cost is incurred and attributed to the cost of cost units.
Examples
a. Workshop
b. Auto Service Department
c. Maintenance Department

3. Revenue Center

A unit or part of the entity that is responsible to earn revenue from sales. The concerned manager is responsible for generating revenues only means no connection with the cost of operations
Examples
a. Sales Department
b. Factory Outlet

4. Profit Center

A profit center is that part of the entity where the responsible person (manager) is responsible for producing a profit by utilizing resources authorized by the entity.
Examples
a. Branch
b. Division

5. Investment Center

It is referred to as a segment of the entity that behaves like a profit center but enjoys the power of making capital investment decisions.
Examples
a. Branch
b. Division

6. Opportunity Cost

The economic benefits of one resource that given up to get maximum or optimal profit using the other resource.
Examples
a. Existing Dairy Form – Commercial Plaza
b. A Building on Rent use for another purpose

7. Relevant Cost

Relevant cost varies as decision changes. These are a future cost that has an impact on the current decision.
Examples
a. The resources need to produce the cost unit such as machinery, tools, skilled labor, etc.
b. All Variable costs are relevant costs while fixed cost that changes with changes in the decision. Additional work with more salary is the relevant cost but with the same salary is not relevant cost.
c. Opportunity cost is a relevant Cost.

8. Irrelevant Cost

Irrelevant costs are those cost which is not affected by changes in decisions.
Examples
a. Building Rent
b. Machine Depreciation (Provided useful life not changed)
c. Salary of investment relation officer is the irrelevant cost if entity decide to launch a new product

9. Sunk Cost

It is a cost that an entity incurred but it cannot be recovered in longer. Changes in the decision do not affect sunk cost. Also irrelevant cost
Examples
a. Research Cost
b. The cost incurred on the foundation for installing a machine.

10. Product Cost

The cost incurred to produce goods and services is termed as product cost. It is the cost that is being considered when calculating the cost of a unit.
Examples
a. Direct Material, Direct Labor, FOH

11. Period Cost

The cost other than the product cost, and booked to profit and loss account.
Examples
a. Selling and distribution Cost
b. Supportive staff salaries
c. Financial expenses

12. Incremental or Differential Cost

The difference in cost associated with the alternative decisions of the same output level.
Examples
a. The first-order cost is Rs.10, 000 and while the cost of 2nd order is Rs8, 000.00, here differential cost is Rs2, 000.00. Please note that both orders have the same level of output.

13. Marginal Cost

The word marginal means additional. Thus the additional cost incurred to produce an additional unit of goods or service is called marginal cost.
In differential cost, the level of output is the same, that is one unit is not involved while in marginal costing, an additional unit is being produced. Further, in differential cost, the cost difference is related to the two same output levels, but in marginal costing, there is no such scenario.

14. Accumulation Cost

The methodologies used to collect information about the set of costs incurred by producing goods or services.

Cost accumulation techniques are:

a. Job-order-costing
b. Processing Cost

In the end, I hope the article "Knows the Important Terminologies used in Cost and Management Accounting" has met the expectations of the readers who are looking for such useful materials at one point to save time in searching each term independently.

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