Cost Accounting Terms: Definitions, Methods, and Examples
Explore cost accounting terms related to direct and indirect costs, product and period costs, manufacturing costs, job order costing, process costing, activity-based costing, standard costing, absorption and variable costing, cost-volume-profit analysis, budgeting, variances, cost control, and practical examples.
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Search for cost accounting definitions and related topics published on Accountant Compass.
Cost Accounting Terms Learning Path
Follow this sequence to understand cost concepts, classifications, costing systems, analysis, and control.
Understand Cost Concepts
Learn how costs are identified, classified, traced, allocated, accumulated, and connected to products, services, departments, and decisions.
What Is Cost Accounting? →Classify Costs
Distinguish direct and indirect costs, product and period costs, fixed and variable costs, and relevant and irrelevant costs.
Explore Cost Classifications →Apply Costing Systems
Study job order costing, process costing, activity-based costing, standard costing, and absorption or variable costing.
Explore Costing Systems →Analyze and Control Costs
Use budgets, variances, contribution margin, break-even analysis, cost drivers, and performance measures.
Explore Cost Analysis →Major Cost Classifications
Costs may be classified by traceability, financial statement treatment, behavior, function, and relevance to decisions.
Direct Costs
Costs that can be economically traced to a specific product, service, job, department, or other cost object.
Indirect Costs
Costs that support multiple cost objects and require a reasonable allocation method.
Product Costs
Manufacturing or acquisition costs attached to inventory until the related goods are sold.
Period Costs
Costs recognized as expenses in the period incurred rather than included in inventory.
Browse Cost Accounting Terms by Category
Use these collections to find related cost definitions, methods, calculations, and explanations.
Cost Classification Terms
Direct, indirect, fixed, variable, mixed, product, period, controllable, relevant, and sunk costs.
Explore Cost Classification Terms →Manufacturing Cost Terms
Direct materials, direct labor, manufacturing overhead, prime cost, conversion cost, and factory costs.
Explore Manufacturing Cost Terms →Job Order Costing Terms
Jobs, job cost sheets, work orders, predetermined overhead rates, applied overhead, and job completion.
Explore Job Order Costing Terms →Process Costing Terms
Departments, equivalent units, units transferred, weighted-average method, FIFO method, and cost reconciliation.
Explore Process Costing Terms →Activity-Based Costing Terms
Activities, cost pools, cost drivers, activity rates, resource drivers, and customer or product profitability.
Explore Activity-Based Costing Terms →Standard Costing Terms
Standard costs, actual costs, price variances, quantity variances, efficiency variances, and spending variances.
Explore Standard Costing Terms →Cost-Volume-Profit Terms
Contribution margin, contribution margin ratio, break-even point, target profit, margin of safety, and operating leverage.
Explore Cost-Volume-Profit Terms →Budgeting and Control Terms
Master budgets, flexible budgets, responsibility centers, variance analysis, performance reports, and cost control.
Explore Budgeting and Control Terms →Essential Cost Accounting Terms
Start with these commonly used cost accounting definitions.
Cost Accounting
The process of measuring, analyzing, assigning, and controlling costs for products, services, operations, and decisions.
View Definition → CCost
A resource sacrificed or obligation incurred to achieve a specific objective.
View Definition → CCost Object
Anything for which management wants a separate measurement of cost.
View Definition → CCost Assignment
The process of tracing direct costs and allocating indirect costs to cost objects.
View Definition → CCost Accumulation
The collection of cost information in an organized accounting system.
View Definition → CCost Allocation
The assignment of indirect costs to cost objects using a reasonable allocation base.
View Definition → CCost Driver
A factor that causes or explains changes in the cost of an activity.
View Definition → CCost Pool
A grouping of individual costs allocated using a common cost driver or base.
View Definition → DDirect Cost
A cost that can be economically traced to a specific cost object.
View Definition → IIndirect Cost
A cost that supports multiple cost objects and cannot be economically traced to only one.
View Definition → DDirect Materials
Materials physically incorporated into a product and economically traceable to it.
View Definition → IIndirect Materials
Materials used in production that are not economically traceable to individual products.
View Definition → DDirect Labor
Labor cost economically traceable to the production of specific goods or services.
View Definition → IIndirect Labor
Labor cost supporting production but not economically traceable to individual units or jobs.
View Definition → MManufacturing Overhead
Indirect manufacturing costs other than direct materials and direct labor.
View Definition → PPrime Cost
The combined cost of direct materials and direct labor.
View Definition → CConversion Cost
The combined cost of direct labor and manufacturing overhead.
View Definition → PProduct Cost
A cost assigned to inventory and recognized as expense when the related goods are sold.
View Definition → PPeriod Cost
A cost recognized as expense in the period incurred rather than included in inventory.
View Definition → IInventoriable Cost
A cost included in inventory until the related goods are sold.
View Definition → NNonmanufacturing Cost
A selling, administrative, financing, or other cost outside the manufacturing function.
View Definition → FFixed Cost
A cost that generally remains constant in total within a relevant range.
View Definition → VVariable Cost
A cost that changes in total in proportion to changes in activity.
View Definition → MMixed Cost
A cost containing both fixed and variable components.
View Definition → SStep Cost
A cost that remains fixed within a narrow activity range and changes in steps.
View Definition → RRelevant Range
The activity range within which cost behavior assumptions are expected to remain valid.
View Definition → UUnit Cost
Total cost assigned to a cost object divided by the related number of units.
View Definition → AAverage Cost
Total cost divided by the number of units, transactions, or another activity measure.
View Definition → MMarginal Cost
The additional cost associated with producing or providing one more unit.
View Definition → IIncremental Cost
The additional cost caused by choosing one alternative over another.
View Definition → DDifferential Cost
The difference in cost between two decision alternatives.
View Definition → RRelevant Cost
A future cost that differs among decision alternatives.
View Definition → IIrrelevant Cost
A cost that does not differ among alternatives and does not affect the decision.
View Definition → SSunk Cost
A past cost that cannot be changed by a current or future decision.
View Definition → OOpportunity Cost
The benefit sacrificed when one alternative is chosen over another.
View Definition → AAvoidable Cost
A cost that can be eliminated by selecting a particular alternative.
View Definition → UUnavoidable Cost
A cost that continues regardless of the alternative selected.
View Definition → CControllable Cost
A cost significantly influenced by a manager within a defined time period.
View Definition → UUncontrollable Cost
A cost a manager cannot significantly influence within a defined time period.
View Definition → CCommitted Fixed Cost
A long-term fixed cost arising from basic organizational capacity or structure.
View Definition → DDiscretionary Fixed Cost
A fixed cost determined through periodic management decisions.
View Definition → JJob Order Costing
A costing system accumulating costs separately for distinct jobs, projects, or batches.
View Definition → JJob Cost Sheet
A document summarizing direct materials, direct labor, and applied overhead for a job.
View Definition → WWork Order
An authorization and tracking document for a specific production or service job.
View Definition → PProcess Costing
A costing system accumulating costs by department or process for similar units.
View Definition → EEquivalent Units
A measure converting partially completed units into fully completed unit equivalents.
View Definition → WWeighted-Average Method
A process costing method combining beginning work in process with current-period activity.
View Definition → FFIFO Process Costing
A process costing method separating beginning inventory work from current-period work.
View Definition → CCost per Equivalent Unit
The cost assigned to one equivalent unit of production.
View Definition → TTransferred-In Cost
A cost received by one production department from a preceding department.
View Definition → WWork in Process
Inventory consisting of partially completed goods.
View Definition → FFinished Goods
Completed goods held for sale.
View Definition → CCost of Goods Manufactured
The total manufacturing cost of goods completed during a period.
View Definition → CCost of Goods Sold
The recognized inventory cost of goods sold during a reporting period.
View Definition → PPredetermined Overhead Rate
An overhead rate established before the period using estimated costs and activity.
View Definition → AApplied Overhead
Manufacturing overhead assigned to production using a predetermined rate.
View Definition → AActual Overhead
The manufacturing overhead cost actually incurred during a period.
View Definition → UUnderapplied Overhead
The excess of actual overhead over applied overhead.
View Definition → OOverapplied Overhead
The excess of applied overhead over actual overhead.
View Definition → PPlantwide Overhead Rate
A single overhead allocation rate used for an entire production facility.
View Definition → DDepartmental Overhead Rate
An overhead rate calculated separately for a production department.
View Definition → AActivity-Based Costing
A costing method assigning resource costs to activities and then to cost objects using drivers.
View Definition → AActivity
A task, event, or unit of work that consumes resources.
View Definition → AActivity Cost Pool
A grouping of costs associated with a defined activity.
View Definition → AActivity Rate
The cost assigned per unit of an activity cost driver.
View Definition → RResource Driver
A measure used to assign resource costs to activities.
View Definition → AActivity Driver
A measure used to assign activity costs to cost objects.
View Definition → UUnit-Level Activity
An activity performed for each unit produced or serviced.
View Definition → BBatch-Level Activity
An activity performed each time a batch is processed.
View Definition → PProduct-Level Activity
An activity supporting a particular product or service line.
View Definition → FFacility-Level Activity
An activity supporting the organization or production facility as a whole.
View Definition → SStandard Cost
A predetermined cost used as a benchmark for materials, labor, or overhead.
View Definition → AActual Cost
The cost actually incurred for resources used or acquired.
View Definition → CCost Variance
The difference between actual cost and a budgeted, standard, or expected cost.
View Definition → MMaterials Price Variance
The difference caused by paying a material price different from the standard price.
View Definition → MMaterials Quantity Variance
The difference caused by using a material quantity different from the standard quantity.
View Definition → LLabor Rate Variance
The difference caused by paying a labor rate different from the standard rate.
View Definition → LLabor Efficiency Variance
The difference caused by using labor hours different from the standard hours.
View Definition → VVariable Overhead Spending Variance
The difference between actual variable overhead and the amount expected for actual activity.
View Definition → VVariable Overhead Efficiency Variance
The effect of using the activity base differently from the standard allowed amount.
View Definition → FFixed Overhead Budget Variance
The difference between actual fixed overhead and budgeted fixed overhead.
View Definition → FFixed Overhead Volume Variance
The difference caused by actual production differing from the denominator activity used in the fixed overhead rate.
View Definition → AAbsorption Costing
A product costing method including direct materials, direct labor, variable overhead, and fixed manufacturing overhead.
View Definition → VVariable Costing
A product costing method including only variable manufacturing costs in inventory.
View Definition → TThroughput Costing
A method treating only direct material as inventoriable cost in selected management contexts.
View Definition → CContribution Margin
Sales revenue minus variable costs.
View Definition → CContribution Margin Ratio
Contribution margin expressed as a percentage of sales.
View Definition → BBreak-Even Point
The activity level at which total revenue equals total cost.
View Definition → TTarget Profit
A specified profit objective used to determine required sales or activity.
View Definition → MMargin of Safety
The excess of actual or expected sales over break-even sales.
View Definition → OOperating Leverage
The sensitivity of operating income to changes in sales caused by the cost structure.
View Definition → CCost-Volume-Profit Analysis
Analysis of how sales volume, prices, variable costs, fixed costs, and profit interact.
View Definition → SSales Mix
The relative proportion of different products or services sold.
View Definition → CComposite Unit
A representative bundle of products used in multiproduct break-even analysis.
View Definition → BBudget
A quantitative plan for a future period.
View Definition → MMaster Budget
An integrated set of operating and financial budgets for an organization.
View Definition → FFlexible Budget
A budget adjusted to the actual level of activity.
View Definition → SStatic Budget
A budget prepared for one planned level of activity.
View Definition → RResponsibility Accounting
A system assigning revenues, costs, and investments to managers responsible for them.
View Definition → CCost Center
A responsibility center whose manager is primarily accountable for costs.
View Definition → PProfit Center
A responsibility center whose manager is accountable for revenue and costs.
View Definition → IInvestment Center
A responsibility center whose manager is accountable for profit and invested assets.
View Definition → PPerformance Report
A report comparing actual results with budgeted or standard results.
View Definition → VVariance Analysis
The process of identifying and explaining differences between actual and expected results.
View Definition → CCost Control
Management actions designed to influence, monitor, and reduce unnecessary costs.
View Definition → CCost Reduction
A planned decrease in cost without unacceptable loss of quality or capability.
View Definition → BBenchmarking
The comparison of processes or costs with internal targets or external best practices.
View Definition → LLearning Curve
A pattern in which labor time or cost per unit declines as cumulative experience increases.
View Definition → QQuality Cost
A cost associated with preventing, identifying, or correcting quality problems.
View Definition → PPrevention Cost
A quality cost incurred to prevent defects.
View Definition → AAppraisal Cost
A quality cost incurred to inspect, test, or evaluate products or processes.
View Definition → IInternal Failure Cost
A cost caused by defects identified before delivery to the customer.
View Definition → EExternal Failure Cost
A cost caused by defects identified after delivery to the customer.
View Definition → LLife-Cycle Costing
The accumulation of costs across a product’s research, design, production, distribution, use, and disposal stages.
View Definition → TTarget Costing
A method deriving an allowable cost from a market price and desired profit.
View Definition → KKaizen Costing
A continuous improvement approach focused on gradual cost reduction during production.
View Definition → BBackflush Costing
A simplified costing method that delays selected cost entries until later production stages.
View Definition → JJoint Cost
A cost incurred before multiple products become separately identifiable.
View Definition → SSplit-Off Point
The stage at which joint products become separately identifiable.
View Definition → BBy-Product
A secondary product with relatively minor value compared with the main products.
View Definition → SSpoilage
Units that do not meet quality standards and cannot be economically corrected.
View Definition → RRework
The process of correcting defective units so they meet required standards.
View Definition → SScrap
Residual material remaining from production with limited recoverable value.
View Definition →Connect Every Cost Term to a Cost Object and Business Decision
Cost accounting definitions become more useful when connected to a clear cost object, cost behavior, traceability, allocation method, production process, reporting purpose, relevant range, activity driver, budget, variance, operational decision, and management objective.
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Frequently Asked Questions About Cost Accounting Terms
What is cost accounting?
Cost accounting measures, accumulates, assigns, analyzes, and controls costs related to products, services, departments, processes, customers, and decisions.
What is the difference between direct and indirect costs?
Direct costs can be economically traced to a specific cost object. Indirect costs support multiple cost objects and require a reasonable allocation method.
What is the difference between product and period costs?
Product costs are attached to inventory and recognized through cost of goods sold. Period costs are recognized as expenses in the period incurred.
What is the difference between job order and process costing?
Job order costing accumulates costs for distinct jobs or batches. Process costing accumulates costs by department or process for large quantities of similar units.
Why is cost variance analysis important?
Variance analysis compares actual results with standards or budgets and helps managers identify price, efficiency, volume, spending, and operational differences.
Continue to Managerial Accounting Terms
After learning how costs are classified, assigned, and controlled, continue with Managerial Accounting Terms to study planning, budgeting, decision-making, responsibility accounting, performance measurement, pricing, and strategic analysis.
Continue to Managerial Accounting Terms