Cost Definitions
Absorption Costs: Direct labor plus direct materials
plus factory overhead.
Avoidable Cost: A cost that can be eliminated by
choosing one alternative over another.
Committed Fixed Costs: Organizational investments
with a multiyear planning horizon that cannot be
significantly reduced even for short periods of time
without making fundamental changes. Compare with
Discretionary Fixed Costs.
Expense: A cost that has been matched with revenue
and has therefore been recognized on the income
statement.
Factory Burden: Synonym for overhead.
Factory Overhead Applied: The amount of overhead
that has been assigned to work-in-process through the
use of a predetermined overhead rate in a normal costing
system.
Factory Overhead Costs: Synonym with Overhead.
Common Cost: A cost that is incurred to support a
number of cost objects but cannot be traced to them
individually. A common cost is a type of indirect cost.
Finished Goods: Work-in-process that has been
completed and is ready for sale.
Conversion Costs: Direct labor plus factory overhead.
The cost of converting direct materials into a finished
product.
Fixed Cost: A cost that remains constant in total
regardless of the level of activity.
Cost: An amount paid or required in payment for a
purchase; a price, or the expenditure of something, such
as time or labor, necessary for the attainment of a goal:
Incremental Cost: An increase in cost from one
alternative to another or the cost to produce the next
product unit.
Cost of Goods Manufactured: The production cost
(direct labor plus direct materials plus overhead) of
work-in-process finished this period and transferred
from the factory to the finished goods storeroom.
Indirect Costs: Costs that cannot easily be identified
with a final cost object.
Cost of Goods Sold: The production cost (direct labor
plus direct materials plus overhead) of goods sold this
period.
Full Cost: Synonym for absorption cost.
Indirect Labor: Labor costs (within the factory) that
cannot easily be identified with a final cost object,
Indirect Materials: Material cost (within the factory)
that cannot easily be identified with a final cost object.
Differential Costs: The difference in costs between two
alternatives.
Inventoriable Costs: Direct labor, direct materials and
overhead.
Direct Cost: A cost that can be easily traced to a specific
cost object.
Joint Costs: Cost incurred by a joint process prior to the
time products are separately identifiable.
Direct Labor: Labor that can easily be identified with a
specific cost object.
Manufacturing Costs: Synonym for product costs.
Direct Materials: Materials that can easily be identified
with a specific cost object.
Discretionary Fixed Costs: Costs that arise from annual
decisions of management to spend on certain fixed costs
items. Compare with Committed Fixed Costs.
Compiled by Richard E. McDermott, January 3, 2012.
Manufacturing Costs Added: The sum of direct labor,
direct materials and overhead incurred during the
accounting period.
Manufacturing Overhead Costs: Synonym for
overhead.
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Cost Definitions
Marginal Cost: Synonym for incremental cost.
Mixed Cost: Costs that have both a fixed and variable
element.
Work-in-Process: Units of product that are only
partially complete and will require further work before
they are ready for sale to the customer.
Nonmanufacturing Costs: Administrative and
marketing costs.
Opportunity Cost: The potential benefit given up when
one alternative is selected over another.
Out of Pocket Costs: Actual cash outlay costs.
Overhead Costs: Indirect costs (within the factory)..
Period Costs: The sum of administrative and marketing
costs. Costs that appear on the income statement in the
period in which they are incurred.
Prime Costs: Direct labor plus direct materials.
Product Costs: The sum of direct labor, direct materials
and overhead. Synonymous with inventoriable costs,
manufacturing costs and production costs.
Production Costs: Synonymous with inventoriable
costs, manufacturing costs and product costs.
Raw Materials: Materials in the raw materials
storeroom which have not been put into production or
applied to an overhead account.
Relevant Costs: Costs that differ between alternatives.
Selling and Administrative Costs: Synonymous with
period costs.
Semi-variable Costs: Costs that vary non-proportionally
with activity or volume.
Standard Cost: In a standard costing system, what a
cost “should be.”
Sunk Costs: A cost that has been incurred and cannot be
changed by any decision now or in the future.
Variable Costs: A cost that varies proportionally with
the level of activity.
Compiled by Richard E. McDermott, January 3, 2012.
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