Glossary

Absorption costing

An approach to costing in which all of the manufacturing costs involved are absorbed by the units produced. Absorption costing, also known as full costing, is where all the fixed manufacturing overheads, as well as variable manufacturing costs, are allocated to products.

Contribution

The excess of revenue generated from the sales of a product/service over the variable costs of producing those goods/services. This is regarded as the ‘contribution’ towards the fixed costs of production.

Cost accounting

The process of collecting, classifying and recording all the costs incurred in a business in a way that can be used to improve the management of such costs.

Cost card

A record showing how the cost of each product is built up, and thus the total cost of one unit of a product. The cost card records the quantities of material and prices, standard labour times, and the rates of pay, as well as the fixed and variable overhead rates per unit of product. Traditionally, this information was kept on a series of cards, but it is now invariably held in computer databases.

Cost object

A unit of product or service in relation to which costs are ascertained.

Cost unit

The unit of product or service for which cost is computed.

Direct costs

A direct cost can be directly traced to a specific cost centre. Direct costs are costs which can be specifically identified with a product. They thus include direct labour and materials but exclude variable overheads.

Fixed costs

A cost that does not change with the level of activity in the relevant range.

Indirect costs

An indirect cost is one that cannot be directly identified to a cost centre and therefore has to be apportioned to cost centres on another suitable basis.

Overheads

Overheads refers to the costs to operate a business but excludes the direct costs associated with creating a product or service.

Relevant cost range

The span of activity over which a certain cost behaviour holds true.

Revenue centres

An organisational segment for which a particular manager is held accountable in terms of revenue earned.

Variable costs

Costs which vary directly with changes in the number of units of output produced.