A to Z Cost Accounting Dictionary: A Practical Approach - Theory to Calculation

By Azhar ul Haque Sario

A to Z Cost Accounting Dictionary: A Practical Approach - Theory to Calculation" is a thorough and comprehensive guide that serves as an invaluable resource for students, academics and professionals navigating the world of cost accounting. This 330-pages long book acts as a handy reference tool, covering essential terminologies and concepts from A to Z meticulously. Unlike other contemporary accounting texts, this dictionary illustrates both theory and practical problems supplemented with accompanying calculations. As a result, accounting practices no longer will stay encapsulated in theory but become understandable once vividly explained in continuation with respective terminologies.

The book further blends each term from general cost accounting terminologies like 'Allocation,' 'Annuity,' to much advanced words and phrases such as 'Activity-based costing,' 'Absorption costing,' while extending t to the rarely tackled 'Zero-based budgeting. It lays bare all accounting terms for easy comprehension of professionals dealing closely accounting practices on a day-to-day basis. 

Unfolding with an easy-to-comprehend layout, the dictionary allows maximal matter coverage efficiently. Each concept is allotted a section broken down systematically into an explanation, application scenarios, and working calculation examples. The accompanying tables, diagrams, charts, and equations at each juncture promise an engaging reading experience, whilst amplifying the comprehension of every cost accounting topic covered.

Engineered to tremendously simplify any reader's journey through an accounting course study or corporate paperwork, our simple descriptions strung with practical case applications unlock a smooth ticket to mastering these principles powerfully. Professors can effectively include this essentially important work as a classroom resource, thereby assisting students to 'term-based explore' every chapter extensively, well aligning the coursework.

Finally, for business or finance professionals, this book is a quick recap of terms that might be out of reach for a considerable time. Flip through pages whimsically or sit ardently penning this workbook-style book page-by-page weeklong; this high-value cost-accounting dictionary invariably will become anyone's pursuit or accounting knowledge.

• Language: English
• Publisher: Azhar ul Haque Sario
• Release date: Sep 6, 2023
• ISBN: 9798223244004

Azhar ul Haque Sario

Hello, my name is Azhar ul Haque Sario, and I am excited to introduce myself to you. I have a strong educational background, having studied O and A levels before pursuing an MBA. I am also a certified project manager and hold Google certifications in digital marketing and e-commerce. Aside from my professional experience, I am also passionate about investing. As an investor, I have developed a keen eye for spotting profitable opportunities and have a track record of making sound investment decisions. I believe that investing is an essential component of building long-term wealth and financial security, and I am committed to helping others achieve their investment goals as well. In my free time, I love sharing my insights and knowledge with others. You can find me posting daily articles on my LinkedIn profile, where I share tips and advice on everything from investing to marketing and beyond. I am always looking for ways to learn, grow, and make a positive impact, and I look forward to connecting with you soon.

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A to Z Cost Accounting Dictionary: A Practical Approach

Theory to Calculation

Azhar ul Haque Sario

Azhar ul Haque Sario

Copyright © 2023 Azhar ul Haque Sario

A to Z Cost Accounting Dictionary: A Practical Approach - Theory to Calculation

© 2023 Azhar ul Haque Sario. All rights reserved.

No part of this book may be reproduced, stored or transmitted in any form without written permission from the copyright owner, except for brief quotations in critical reviews or articles.

This book is a work of non-fiction. The information contained in this book is based on the author’s research and experience. While every effort has been made to ensure the accuracy of the information, the author and publisher make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties.

The publisher and author assume no responsibility for any loss or damage that may result from the use of information contained within this work.

Author: Azhar ul Haque Sario

Publisher: Azhar ul Haque Sario

Cover design: Azhar ul Haque Sario

For permission requests, please contact the author at [e-mail]

Disclaimer: The opinions expressed in this book are those of the author and do not necessarily reflect the views of any organizations or individuals mentioned herein. The author and publisher shall have no liability or responsibility to any person or entity with respect to any loss or damage caused or alleged to be caused directly or indirectly by the information contained in this book.

I dedicate this book to my future self, who I hope will continue to grow and learn in the field of accounting. May this book be a reminder of the hard work and dedication it took to get here and a source of inspiration for future endeavors.

Azhar ul Haque Sario

A to Z Cost Accounting Dictionary: A Practical Approach - Theory to Calculation

Table of Contents

Copyright

Abnormal loss

The accounting rate of return (ARR)

Activity analysis

Activity-based budgeting (ABB)

Activity-based costing (ABC)

Activity-Based Management (ABM)

Allocation

Annuity

Annuity due

Applied overhead

Appraisal cost

Appropriation

Asset turnover

Attribute-based costing

Backflush costing

Batch-level cost

Break-even chart

Break-even point (BEP)

Budget

Budgeted cost

Budget variance

By-product

Capital budgeting

Capital budgeting

Capital rationing

Carrying cost

Committed cost

Compound interest

Continuous budgeting

Contribution margin

Contribution margin ratio

Controllable costs

Controllable variance

Conversion cost

Correlation analysis

Cost accounting

Cost accumulation

Cost allocation

Cost avoidance

Cost-benefit analysis

Cost center

Cost control system

Cost driver

Cost driver analysis

Cost management system (CMS)

Cost object

Cost of capital (COC)

The cost of goods manufactured (CGM)

Cost-plus contract

Cost pool

Cost-volume-profit (CVP) analysis

Differential cost

Direct cost

Direct labor

Direct material

Direct method

Discretionary costs

Distribution costs

Dividend growth method

Dollar days

The Du Pont model

Economic Order Quantity (EOQ)

Fixed overhead spending variance

Fixed overhead volume variance

Flexible budget

High-low method

Indirect costs

Investment center

Job cost record

Job order cost sheet

Job order costing system

Joint cost

Joint process

Joint product

Just-in-time (JIT)

Labor efficiency variance

Labor mix variance

Labor rate variance

Labor yield variance

Life cycle costing

Long-term variable cost

Make-or-buy decision

Management accounting

A Management Control System (MCS)

A Management Information System (MIS)

Margin of safety

Master budget

Material price variance

Material quantity variance

Material mix variance

Material yield variance

Mixed cost

Normal capacity

Normal cost system

Normal loss

Operating budget

Operating leverage

Operational plan

Ordering cost

Order point

Overhead or Indirect Cost

Overhead efficiency variance

Overhead spending variance

Performance Management System

Period cost

Physical measurement allocation

Piece rate

Predetermined overhead rate (POR)

Prime cost

Process costing system

Processing time

Product cost

Productive capacity

Profit center

Profit-volume graph

Purchasing cost

Relevant cost

Replacement cost

Responsibility center

Revenue center

Safety stock

Scrap

Sensitivity analysis

Setup cost

Standard cost

Standard cost system

Step cost

Step method

Sunk cost

Target costing

Total overhead variance

Underapplied overhead

Variable cost

Variable overhead efficiency variance

Variance

Variance analysis

Volume variance

Zero-based budgeting

Abnormal loss

Abnormal loss refers to the loss of inventory due to events or circumstances beyond a company's control. This could include theft, accidental damage, spoilage, and other similar factors. In the context of cost accounting, abnormal loss represents a cost that must be accounted for in the final cost of goods sold.

Example 1: Imagine you have a toy collection with all your favorite action figures. However, one day, while you were playing with them, one of the figures accidentally fell and broke. This is an example of an abnormal loss, as it was a loss that you didn't expect or plan for. You will now need to replace this toy, which will cost money.

Example 2: Let's say you love baking cookies and you have a big batch of dough that you prepared. However, while you were getting ready to bake them, your little brother came into the kitchen and spilled some oil on the dough, rendering it unusable. This is another example of an abnormal loss, as it was a loss that you couldn't control. You will now need to discard the dough and start over, which will require additional ingredients and time.

Question: A company has 10,000 units of inventory, with a cost of $5 per unit. Due to a flood in the storage facility, 500 units become unusable and are considered abnormal loss. What will be the company's cost of goods sold, assuming they are able to sell the remaining inventory at a price of $7 per unit?

Solution: To calculate the cost of goods sold, we need to account for the abnormal loss. The cost of the 500 units that were lost is $5 x 500 = $2,500. The remaining inventory is 10,000 - 500 = 9,500 units, with a total cost of $5 x 9,500 = $47,500. The cost of goods sold is therefore $2,500 + $47,500 = $50,000. The revenue from selling the remaining inventory is 9,500 units x $7 per unit = $66,500. The company's profit will be $66,500 - $50,000 = $16,500.

An example of a practical application of abnormal loss could be in the context of a food processing plant. If a shipment of produce becomes contaminated due to a virus or bacteria, it may need to be discarded to ensure the safety of consumers. This is a type of abnormal loss that must be accounted for in the final cost of goods sold, as it represents a cost to the company.

Absorption costing

Absorption costing is a method of cost accounting that involves allocating all costs associated with manufacturing a product, including direct and indirect costs, to the final cost of the product itself. This method helps companies better understand the true cost of producing their goods and services, and leads to more informed pricing decisions.

Example 1: Imagine you are making lemonade to sell at a lemonade stand. You have to buy the lemons, sugar, and cups, and use electricity to mix everything together. Absorption costing means that you would take into account all of these costs when determining the price that you should charge for your lemonade. This includes not only the direct cost of the ingredients themselves (which are known as variable costs), but also the cost of the electricity that you used to make the lemonade (known as a fixed cost).

Example 2: Let's say you want to make a homemade pizza. You need to buy the ingredients such as cheese, tomato sauce, dough, etc. Absorption costing means that you would take into account not only the cost of these ingredients, but also any other costs that are incurred in order to make the pizza. This could include the cost of the oven, any tools used to make the pizza, and utilities like gas or electricity.

Question: A company produced 10,000 units of a product during the month of June. The direct material costs incurred were $50,000, while the direct labor costs were $25,000. The company also incurred $20,000 in indirect overhead costs, such as utilities and rent for the factory. What is the total cost per unit of the product, assuming that the company uses absorption costing?

Solution: To find the total cost per unit of the product using absorption costing, we need to consider all of the costs associated with producing the product. This includes the direct material costs, direct labor costs, and indirect overhead costs. To allocate these costs, we divide the total costs ($50,000 + $25,000 + $20,000 = $95,000) by the number of units produced (10,000). This gives us a total cost per unit of $9.50.

An example of a practical application of absorption costing could be in the context of a car manufacturer. The manufacturer would need to consider all of the costs associated with producing a car, including not just the cost of materials and labor, but also the cost of overhead items such as the cost of the factory building itself and all of the equipment used to produce the car. By using absorption costing, the car manufacturer can have a better understanding of the true cost of producing each car, which then allows them to make informed pricing decisions.

The accounting rate of return (ARR)

The accounting rate of return (ARR) is a method used in capital budgeting to evaluate the profitability of an investment. The ARR is calculated by dividing the average annual net profit of an investment by the initial investment outlay. This calculation helps business owners to make informed decisions when investing in projects or purchasing assets.

Example 1: Imagine you want to start a lemonade stand. You need $100 for lemonade ingredients, cups, and other supplies. If you can sell the lemonade for $1 per cup and sell 300 cups per week, your weekly revenue will be $300. This means you can make $1,200 per month, or $14,400 per year in revenue. If your expenses each year are $1,000, your annual net profit would be $13,400. If you divide this by the initial investment of $100 to start the stand, you get an accounting rate of return of 134%.

Example 2: Let's say you want to buy a bicycle to offer ride-sharing services. The bike costs $500, but you believe you can rent it out for $5 per hour, and you predict it will be rented for an average of 500 hours per year. Your revenue would be $2,500 per year, and if your expenses amount to $500 per year (mainly maintenance and repair costs), your net profit for the year would be $2,000. If you divide this by the initial investment of $500, you get an accounting rate of return of 400%.

Question: A company wants to invest in a new printing press that will cost $50,000. The company believes that it can earn an average annual net profit of $20,000 from using the press. What will be the accounting rate of return for this investment?

Solution: To calculate the accounting rate of return for the investment in the new printing press, we need to divide the average annual net profit ($20,000) by the initial investment ($50,000). This gives us an ARR of 40%.

An example of a practical application of the accounting rate of return could be in the context of a real estate project, in which an investor wants to purchase and renovate an old building to sell at a higher price. The investor would need to calculate the potential net profit from the sale of the building after renovations, and then divide it by the initial investment to determine the accounting rate of return.

Activity analysis

Activity analysis is a method used in cost accounting to analyze the costs of a particular activity or process within a company. This method helps businesses to identify areas where costs can be reduced, productivity can be increased, and overall efficiency can be improved.

Example 1: Imagine you have a lemonade stand and you need to make lemonade for your customers. You realize that you are spending too much time squeezing lemons by hand, which is making your process slow and inefficient. By using a lemon squeezer or a juicer, you can reduce the time it takes to make the lemonade and increase your productivity.

Example 2: Let's say you are a teacher and you notice that your students are taking too much time to complete assignments. By analyzing the activities that your students are doing, you realize that some students are spending too much time on non-essential tasks or struggling with certain concepts. By adjusting your teaching methods, you can help your students complete their assignments more efficiently.

Question: A company produces two products, A and B, using two different processes. Process 1 has an annual overhead cost of $150,000 and produces 10,000 units of product A and 5,000 units of product B. Process 2 has an annual overhead cost of $100,000 and produces 8,000 units of product A and 6,000 units of product B. What is the overhead cost per unit of product A and product B for each process?

Solution: To find the overhead cost per unit of each product for each process, we need to divide the annual overhead cost by the number of units produced for each product. For process 1, the overhead cost per unit of product A is $150,000 / 10,000 = $15, and the overhead cost per unit of product B is $150,000 / 5,000 = $30. For process 2, the overhead cost per unit of product A is $100,000 / 8,000 = $12.50, and the overhead cost per unit of product B is $100,000 / 6,000 = $16.67.

An example of a practical application of activity analysis could be in the context of a retail store. The store owner could analyze the activities of their salespeople, such as how much time they spend assisting customers, organizing merchandise, and completing administrative tasks. By identifying areas where salespeople are spending too much time on non-essential tasks, the store owner can allocate their time more efficiently and increase productivity.

Activity-based budgeting (ABB)

Activity-based budgeting (ABB) is a budgeting method that focuses on the activities that drive costs within a company. This method helps businesses to identify their cost drivers and allocate resources more efficiently by creating budgets based on the needs of each activity.

Example 1: Imagine you are getting ready to go back to school and you need new school supplies. By creating an activity-based budget, you can allocate your money more efficiently based on the activities you will be doing throughout the year. For example, if you will be doing a lot of art projects, you may need to buy more supplies like paint and paper. By budgeting specifically for these activities, you can ensure that you have enough resources to complete your school work.

Example 2: Let's say you want to have a birthday party. By creating an activity-based budget, you can allocate your money more efficiently based on the activities you will be doing at the party. For example, if you are planning a craft activity, you may need to budget for supplies like markers and paper. By budgeting specifically for each activity, you can ensure that you have enough resources to make your party a success.

Question: A company has identified four activities that drive its costs: production, marketing, administration, and customer service. The company's total budget for the year is $1,000,000. How should the budget be allocated based on the identified activities?

Solution: To allocate the budget based on the identified activities, we need to determine the cost drivers for each activity. For example, the cost drivers for production may include raw materials and labor costs. The cost drivers for marketing may include advertising and promotional costs. The cost drivers for administration may include salaries and office expenses. The cost drivers for