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April 10, 2019 0 Comment

1. Cost Centre: this can be defined as a small part of company (a function, department, activity) to which costs may be assigned and credited to `cost units. For example, cost centres in a manufacturing company might be the assembly department, finishing department, stores and warehousing department, customer service department etc. The costs incurred by the cost centre are charged to that centre so that information can be gathered about the total costs incurred.
2. Direct Cost: Is an expenditure that can be directly identified with a particular cost unit or cost centre. For example, direct material costs in a product are the costs of the materials that go into making that products. Direct labour costs of the products are costs of the labour directly engaged in the manufacture of the products.
3. Fixed Cost: Are costs that are not affected in total by the level of activity, but remain same amount regardless of how much or how little work is done in the period. An example is the factory rents, which is constant amount each period regardless of what is manufactured in it.
4. Indirect Cost: Are expenditure which cannot be directly identified with a particular cost centre or cost unit and must be shared on an equitable basis. For example in manufacturing company, the cost of indirect materials may include the cost of materials used to clean and maintain the machinery. Indirect labour costs of a products are the costs of labour that does not spend a measurable amount of time directly on making the product. Indirect expenses usually include all general expenses, such as the costs of building rental, heating and lighting and so on.
5. Operational Cost: this are costs related to the operations of the business. They are the costs of resources used by a business to maintain its existence. This are the expenses associated with the maintenance and administration of a business on a daily basis. Examples include salaries, bank charges, travel expenses and entertainment costs.
6. Overhead Cost: this are costs that can’t be economically attributed directly to cost units. Overheads are another term for indirect costs. Overheads are classified by function e.g. production overheads, selling overheads, administration overheads.
7. Variable Cost: Are costs that change in total in direct proportion to the level of activity. It is an example of direct material costs. Each additional unit produced of a products needs the same quantity of materials, which costs the same.
8. Absorption Cost: In absorption costing, the cost of a product or service is established by adding a share of overheads to direct costs. In absorption costing, fixed manufacturing overheads are absorbed into cost units. Thus stock is valued at absorption cost and fixed manufacturing overheads are charged in the profit and loss account of the period in which the units are sold. It is a method of accumulating all the costs associated with the production process and allocating them to individual products.
9. Cost Driver: Is anything that causes a change or difference in the cost of an event or activity. It triggers a variation in the cost of a transaction or business events. Examples of cost driver in a manufacturing sector are number of purchase orders raised in the procurement department, number of breakdowns in maintenance etc.
10. Breakeven point: Breakeven is the quantity of sales at which the organisation break’s even i.e. the business neither makes a gain nor a loss. At breakeven point, the total expenses incurred by the business equal the total revenue generated. Knowledge of the breakeven point can be useful for management because it shows the minimum revenue that must be generated to avoid making a loss in the period. At breakeven point, the total contribution is just large enough to cover fixed costs.
11. Contribution: it is the variance between sales and the variable cost of sales. The idea is that after subtracting the variable costs from sales, the remaining value is the amount funds the fixed cost and once this is covered then profits.
12. Standard Costs: is a predetermined measureable quantity set in defined conditions and stated in money. Standard costs is derived from a calculation of the value of cost elements. It is used for providing bases for measuring variances, valuing stocks and establishing selling prices. It is a practice of replacing an expected costs for the actual costs in the accounting recordings, then periodically accounting for the variances between both costs type. They are used are targets in most causes. There are various ways of setting the standard costs which include basic standard, ideal standard, attainable standard and current standard.
13. Marginal Costing: In marginal costing, products and services are valued at their marginal costs (variable costs) only. Other costs are then treated as the cost of incurred in the period and charged against the profit.
14. Profit Centre: A profit centre is a part of an organisation be it a function, department, business unit, and division, item of equipment or production line whose costs and revenues can be ascertained. A profit center is similar to cost centre but it also earns revenue and thus profits which can be identified separately.
15. Revenue Centre: A revenue centre is a part of the organisation that earns sales revenue. Its managers are responsible for the revenue earned, but not for the cost of operations. Revenue centres are generally associated with selling activities.
16. Activity Based Costing: Activity based costing is the process of assigning costs to cost units on the basis of value derived from the indirect activities e.g. ordering, setting up, and assuring quality. The ABC system recognises that activities consume resources and products consume activities. It also recognises direct labour and machine hours are not meaningful cost drivers for many overheads in modern manufacturing environments.
17. Avoidable costs: Expenses or costs that a company can do without by changing their mode of operations or processes are referred to as avoidable costs.
18. Opportunity Costs: An opportunity cost can be described as the cost of a particular course of action compare to the next best alternative course of actions. It may also be described at the value of the alternative forgone in other to pursue another option. For example, the opportunity cost of studying for an MBA in Lagos Business School is the vacation to Bahamas that needs to be forgone.
19. Sunk Costs: Sunk costs are expenses that have already been spent and cannot be gotten no matter the direction the business decides to go. These costs are not important for future business decision making because they will be same no matter the outcome of the decision. Examples of such costs are market research costs.
20. Historical Costs: These are past expenses or costs of an organisation and are not relevant for decision making, although they may be useful as a basis for predicting future costs.

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