Cost Definitions
Absorption Costs: Direct labor plus direct materials
plus factory overhead.
Avoidable Cost: A cost that can be eliminated by
choosing one alternative over another.
Committed Fixed Costs: Organizational investments
with a multiyear planning horizon that cannot be
significantly reduced even for short periods of time
without making fundamental changes. Compare with
Discretionary Fixed Costs.
Common Cost: A cost that is incurred to support a
number of cost objects but cannot be traced to them
individually. A common cost is a type of indirect cost.
Conversion Costs: Direct labor plus factory overhead.
The cost of converting direct materials into a finished
product.
Cost: An amount paid or required in payment for a
purchase; a price, or the expenditure of something, such
as time or labor, necessary for the attainment of a goal:
Cost of Goods Manufactured: The production cost
(direct labor plus direct materials plus overhead) of
work-in-process finished this period and transferred
from the factory to the finished goods storeroom.
Cost of Goods Sold: The production cost (direct labor
plus direct materials plus overhead) of goods sold this
period.
Differential Costs: The difference in costs between two
alternatives.
Direct Cost: A cost that can be easily traced to a specific
cost object.
Direct Labor: Labor that can easily be identified with a
specific cost object.
Direct Materials: Materials that can easily be identified
with a specific cost object.
Discretionary Fixed Costs: Costs that arise from annual
decisions of management to spend on certain fixed costs
items. Compare with Committed Fixed Costs.
Compiled by Richard E. McDermott, January 3, 2012.
Expense: A cost that has been matched with revenue and
has therefore been recognized on the income statement.
Factory Burden: Synonym for overhead.
Factory Overhead Applied: The amount of overhead
that has been assigned to work-in-process through the
use of a predetermined overhead rate in a normal costing
system.
Factory Overhead Costs: Synonym with Overhead.
Finished Goods: Work-in-process that has been
completed and is ready for sale.
Fixed Cost: A cost that remains constant in total
regardless of the level of activity.
Full Cost: Synonym for absorption cost.
Incremental Cost: An increase in cost from one
alternative to another or the cost to produce the next
product unit.
Indirect Costs: Costs that cannot easily be identified
with a final cost object.
Indirect Labor: Labor costs (within the factory) that
cannot easily be identified with a final cost object,
Indirect Materials: Material cost (within the factory)
that cannot easily be identified with a final cost object.
Inventoriable Costs: Direct labor, direct materials and
overhead.
Joint Costs: Cost incurred by a joint process prior to the
time products are separately identifiable.
Manufacturing Costs: Synonym for product costs.
Manufacturing Costs Added: The sum of direct labor,
direct materials and overhead incurred during the
accounting period.
Manufacturing Overhead Costs: Synonym for
overhead.
Marginal Cost: Synonym for incremental cost.
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 Cost Definitions

Mixed Cost: Costs that have both a fixed and variable Work-in-Process: Units of product that are only
element. partially complete and will require further work before
they are ready for sale to the customer.
Nonmanufacturing Costs: Administrative and
marketing costs.

Opportunity Cost: The potential benefit given up when

one alternative is selected over another.

Out of Pocket Costs: Actual cash outlay costs.

Overhead Costs: Indirect costs (within the factory)..

Period Costs: The sum of administrative and marketing

costs. Costs that appear on the income statement in the
period in which they are incurred.

Prime Costs: Direct labor plus direct materials.

Product Costs: The sum of direct labor, direct materials

and overhead. Synonymous with inventoriable costs,
manufacturing costs and production costs.

Production Costs: Synonymous with inventoriable

costs, manufacturing costs and product costs.

Raw Materials: Materials in the raw materials

storeroom which have not been put into production or
applied to an overhead account.

Relevant Costs: Costs that differ between alternatives.

Selling and Administrative Costs: Synonymous with

period costs.

Semi-variable Costs: Costs that vary non-proportionally

with activity or volume.

Standard Cost: In a standard costing system, what a

cost “should be.”

Sunk Costs: A cost that has been incurred and cannot be

changed by any decision now or in the future.

Variable Costs: A cost that varies proportionally with

the level of activity.

Compiled by Richard E. McDermott, January 3, 2012. Page 2