Cost Terminology in Business Accounting

Cost Terminology

• Cost is the utilization of assets' resources to obtain another asset (usually cash).
• Prime Cost consists of all direct costs, including direct material cost and direct labor cost.
• Conversion Costs are used to convert raw materials into finished goods.
• Overhead Costs include all costs other than raw material and direct labor that are used to determine the value of the product and inventories.

Cost Classification According to Behaviour

• Fixed Costs remain constant or unchanged despite changes in output within a given relevant range.
• Variable Costs vary according to the variation in unit of output.
• Semi-Variable Costs are a combination of variable costs and fixed costs.

Cost Classification According to Tracing & Allocation

• Direct Costs can be traced to a business activity, such as direct materials cost or direct labor cost.
• Examples of Direct Costs include flour, water, sugar, eggs, and utensils (materials), and chef, cashier, and other workers (labor).
• Indirect Costs, also known as Overheads, include expenses such as halal certification, rent of shop, telephone, electricity, water bills, and other cost items that do not fall under material and labor categories.

Accounting for Materials

• No specific notes, as this section appears to be an introduction to a new chapter.

Functions of Management Accounting

• Controlling involves ensuring that divisional, departmental, sectional, and individual performances are consistent with predetermined objectives and goals.
• Decision-making involves allocating resources effectively to maximize returns or profit.

Overview of Cost Management

• Cost Management involves Material Costs, Labour Costs, and Overhead Costs.
• Cost and Valuation methods include LIFO, FIFO, Weighted Average, and other methods.
• Inventory Management techniques include EOQ, Re-Order Point, Safety Stock, and JIT.
• Cost Allocation methods include the Traditional Method, Activity-Based Costing, and different costing methods such as Actual, Normal, and Standard Costing.

Understand the concepts of cost and prime cost in business accounting. Learn how to utilize assets to obtain another asset, usually cash. Identify the components of prime cost, including direct material cost and direct labor cost.