Cost Management - Concepts
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Cost
Definition
An amount that has to be paid or given up in order to get something.
In business, cost is usually a monetary valuation of (1) effort, (2) material,
(3) resources, (4) time and utilities consumed, (5) risks incurred, and
(6) opportunity forgone in production and delivery of a good or service.
Allexpenses are costs, but not all costs (such as those incurred
in acquisition of an income-generating asset) are expenses.
output
Definitions (3)
1. The amount of energy, work, goods, or servicesproduced by
a machine, factory, company, or an individualin a period.
2. Computing: A result produced by a computer that isinternal to
the system (from one program or process to another) or external to it (from a
program or process to anoutput device) but internal to an output device
(modem,monitor, printer, etc.).
3. Contracting: The desired result from a project orcontractor.
sales revenue
Definition
The amount realized from selling goods or services in the
normal operations of a company in a specified period.
depreciation
Definitions (4)
1.
Accounting: The gradual conversion of the cost of a tangible capital
asset or fixed asset into an operational expense (called depreciation expense)
over the asset's estimated useful life.
The objectives of computing depreciation are to (1) reflect reduction in
the book value of the asset due to obsolescence or wear and tear,(2) spread a large expenditure (purchase price of the asset) proportionately
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over a fixed period to match revenue received from it, and
(3) reduce the taxable income by charging the amount of
depreciation against the company's total income. In effect, charging of
depreciation means the recovery of invested capital, by gradual sale of the
asset over the years during which output or services are received from it.
Depreciation is computed at the end of an accounting period (usually a year),
using a method best suited to the particular asset. When applied to intangible
assets, the preferred term is amortization.
2. Commerce: The decline in the market value of an asset.
3. Economics: The decrease in the economic potential of an asset over
its productive or useful life.
4. Foreign exchange: The reduction in the exchange valueof a currency,
either by a government or due to weakening of the underlying economy in
a floating exchange rate system.
Insurance
Definition
Risk-transfer mechanism that ensures full or partial financial compensation
for the loss or damage caused by event(s) beyond the control of
the insured party. Under an insurance contract, a party
(the insurer) indemnifies the other party (the insured) against a
specified amount of loss, occurring from specified eventualities within a
specified period, provided a fee called premium is paid. In general insurance,
compensation is normally proportionate to the loss incurred, whereas in life
insurance usually a fixed sum is paid. Some types of insurance (such
as product liability insurance) are an essential component of risk
management, and are mandatory in several countries. Insurance,
however, provides protection only against tangible losses. It cannot ensure
continuity of business, market share, or customer confidence, and cannot
provide knowledge, skills, or resources to resume the operations after
a disaster
Interest
Definitions (2)
1.
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Finance: A fee paid for the use of another party's money. To the borrower it
is the cost of renting money, to the lender the income from lending it.
Interest on all debt is normally deductible before taxes are assessed on a
company's income. Corporate legislation requires disclosure of interest
payable on loans, and companies often show a single interest figure in
the income statement while providing details in a note that may also
include netting out of interest received or some other adjustments. In cost
accounting, interest is normally excluded from cost computations on
the grounds that (being a payment for capital) it is equivalent to dividend,
and hence is a finance item and not a cost item. The rate of interest is usually
expressed as an annual percentage of the principal, and is influenced by
the money supply, fiscal policy, amount being borrowed, creditworthiness of
the borrower, and rate of inflation. the two types of interest are simple
interest and compound interest.
2.
Law: An advantage, claim, duty, liability, right, and/or title associated with
a tangible or intangible item. Legal claim or right in or over
an asset or property is called a security interest.
Depending on the situation, holding an interest may also be
a qualification (such as the requirement of insurable interest for an insurance
policy) or disqualification (such as a direct interest in the subject matter of
a court case by anyone acting in a judicial capacity)
Rent
Definitions (2)
1. General: Compensation paid by a tenant (or lessee) to the property
owner (or lessor) for use or occupancy of a property.
2. Economics: Surplus generated by the supply of any resource (capital,
human, natural) over the amount necessary to produce, or bring forth,
the quantity of resources supplied. See also economic rent.
Salary
Definition
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Agreed-upon and regular compensation for employment that may be paid in
any frequency but, in common practice, is paid on monthly and not on
hourly, daily, weekly, or piece-work basis.
Wages
Definition
Cost of using labor as opposed to cost of using capital or land. As a price of
labor, it is subject to the forces of demand and supply in the labor market,
which in turn is affected by productivity levels and ability of the employers
to substitute labor with other factors of production such as machinery. See
also wage.
Practice
Definitions (2)
1. A method, procedure, process, or rule used in a
particular field or profession; a set of these regarded as standard.
2. A business in which a professional or number of
associated professionals offer services, such as a law practice or a medical
practice.
Costs
Definition
Law: Legal charges, fees, other expenses associated with a lawsuit and,
sometimes, punitive charges, assessed and awarded by a court in favor of
the prevailing party.
Concept
Definitions (3)
1. Advertising: A briefly stated clear idea around which an ad or marketing
campaign is organized.
2. Product development: A clear, detailed description of the
attributes and benefits of a new product that addresses the needs of the
targeted customers.
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3. The reasoning behind an idea, strategy, or proposal with particular
emphasis placed on the benefits brought on by that idea. Examples of
concepts include the design for a new automobile or the pitch behind
an advertising campaign.
Short-term
Definition
Usually one year or less, often used to refer to bonds or loans. Opposite
of long-term.
Cost accounting
Definition
A method of accounting in which all costs incurred in carrying out
an activity or accomplishing a purpose are collected, classified, and recorded.
This data is then summarized and analyzed to arrive at a selling price, or to
determine where savings are possible.
In contrast to financial accounting (which considers money as
the measure of economic performance) cost accounting considers money as
the economic factor of production
Firm
Definition
Any business, such as a sole proprietorship, partnership or corporation.
high
Definition
The highest price that was paid for a security during a certain time period.
Variable cost
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Definition
A periodic cost that varies in step with the output or the sales revenue of a
company.
Variable costs include raw material, energy usage, labor, distribution costs,
etc. Companies with high variable costs are significantly different from those
with high fixed costs. This difference affects the financial structure of the
company as well as its pricing and profits. The breakeven point in such
companies (in comparison with high fixed cost companies) is typically at a
much lower level of output, but their marginal profit (rate of contribution) is
also much lower.
Financial structure
Definition
Framework of various types of financing employed by a firm to acquire
and support resources necessary for its operations. Commonly,
it comprises of stockholders' (shareholders') investments (equity
capital), long-term loans (loan capital), short-term loans (such as overdraft),
and short-term liabilities (such as trade credit) as reflected on the right-
hand side of the firm's balance sheet. Capital structure, in comparison, does
not include short-term liabilities.
Pricing
Definition
Method adopted by a firm to set its selling price. It usually depends on
the firm's average costs, and on the customer's perceived value of the
product in comparison to his or her perceived value of
the competing products. Different pricing methods place varying degree of
emphasis on selection, estimation, and evaluation of costs, comparative
analysis, and market situation. See also pricing strategy.
Profit
Definition
The surplus remaining after total costs are deducted from total revenue, and
the basis on which tax is computed and dividend is paid. It is the best
known measure of success in an enterprise.
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Profit is reflected in reduction in liabilities, increase in assets, and/or increase
in owners' equity. It furnishes resources for investing in future operations,
and its absence may result in the extinction of a company. As an indicator of
comparative performance, however, it is less valuable than return on
investment (ROI). Also called earnings, gain, or income.
Comparison
Definitions (2)
1. Correspondence between two brokers outlining the terms of
a transaction prior to settlement. also called comparison ticket.
2. More generally, an evaluation of two or more things in relation to each
other.
Marginal profit
Definition
The excess of marginal revenue over marginal cost. In the best-
case scenario, marginal profit is equal to zero.
If, at a given output level marginal revenue is equal to the marginal cost (MR
= MC), the marginal profit is zero. This is the most profitable rate of output
because all opportunities to make marginal profit have been exhausted. If at
an output level the marginal revenue is less than the marginal cost, there will
be marginal loss and total profit will be reduced.
Contribution
Definitions (4)
1. General: Imposed or required payment.
2. Accounting: Amount left over after direct (variable) costs
are deducted from the sales revenue. Also called gross income,
this sum pays for indirect (fixed) costs and contributes to net income.
3. Insurance: Proportional sharing of loss by the insurers when more than
one policy is taken by the insured for the same peril. Under a contract of
indemnity, the insured cannot profit from his or her misfortune irrespective of
the number of policies.
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4. Law: Right of a joint debtor (or joint tortfeasor) who pays entirely
a debt (or liability) to recover from other joint debtors (or joint tortfeasors)
their individual shares of the debt (or liability).
Fixed Cost Definition:
A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unitbasis, it varies inversely with the level of activity.
Variable Cost Definition:
Variable cost is a cost that varies, in total, in direct proportion to changes in thelevel of activity. A variable
Income Statement Definition:
Income statement is the summary of a management's performance as reflectedin the profitability (or lack of it) of a firm over a certain period. It itemizesthe revenues and expenses of past that led to the current profit or loss, and
indicates what may be done to improve the results. In contrast to a balance sheet(which is a 'still photograph' taken at a certain time) an income statement is a
'movie' that depicts what happened over a month, quarter, or year. It is based ona fundamental accounting equation (Income = Revenue - Expenses) and showsthe rate at which the owners equity is changing for better or worse. Alongwith balance sheet and cash flow statement it forms the basic set of financialinformation required to manage a firm. Also called earnings report, operatingstatement, or profit and loss account.
Break-even
Break-even (or break even) is a point where any difference between plus or minus or
equivalent changes side.
A technique for which identifying the point where the total revenue is just sufficient to
cover the total cost. The formula for break even point is fixed costs/fixed expense
over contribution per unit. In economics & business, specifically cost accounting,
the break-even point (BEP) is the point at which cost or expenses and revenue are
equal: there is no net loss or gain, and one has "broken even". A profit or a loss
has not been made, although opportunity costs have been paid, and capital has
received the risk-adjusted, expected return, break even point)
Break Even Point Definition:
Break even point is defined as the level of sales at which profit is zero. Thebreak-even point can also be defined as the point where sales total equals total
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expenses or as the point where total contribution margin equals total fixedexpenses.
Direct Materials Definition:
Those materials that become an integral part of a finished product and can beconveniently traced into it.
Direct Labor Definition:
Direct labor costs are those factory labor costs that can be easily traced toindividual units of product. Also called touch labor.
Cost of Goods Sold (COGS) Definition:• Cost of goods sold, COGS, or "cost of sales", includes the direct costs
attributable to the production of the goods sold by a company.
• Figure representing the cost of buying raw materials and producingfinished goods.
• The amount paid for the goods sold during an accounting period.
• The total cost of purchasing raw materials and manufacturing finished
goods. Equal to the beginning inventory plus the cost of goods purchasedduring some period minus the ending inventory.
• Determined for the period by counting the merchandise left at the end of the period (physical inventory) and subtracting its cost from the total cost
of merchandise available for sale.• the total cost to the business of the goods sold during
an accounting period. In its simplest form this is the sum of theopening stock plus all purchases less the closing stock.
Income Statement Definition:
Income statement is the summary of a management's performance as reflectedin the profitability (or lack of it) of a firm over a certain period. It itemizes therevenues and expenses of past that led to the current profit or loss, and indicateswhat may be done to improve the results. In contrast to a balance sheet (which is
a 'still photograph' taken at a certain time) an income statement is a 'movie' thatdepicts what happened over a month, quarter, or year. It is based on afundamental accounting equation (Income = Revenue - Expenses) and shows therate at which the owners equity is changing for better or worse. Along with
balance sheet and cash flow statement it forms the basic set of financialinformation required to manage a firm. Also called earnings report, operating
statement, or profit and loss account.
Job Order Costing System Definition:
A costing system used in situations where many different products, jobs, or
services are produced each period.
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Manager Definition:
Someone who works with and through other people by coordinating their workactivities in order to accomplish organizational goals.
OR
One who handles, controls, or directs, especially:
• One who directs a business or other enterprise.
• One who controls resources and expenditures, as of a household.
OR
One who is in charge of the business affairs of an entertainer.
Management Definition:
Coordinating work activities so that they are completed efficiently andeffectively with and through other people.
Activity-based costing (ABC)
Definition:A costing method based on activities that is designed to provide managers withcost information for strategic and other decisions that potentially affect capacityand therefore fixed costs.