DEFINATIONS

Absorption costing: Absorption costing is a method of sharing

overheads between a number of different products or services on a
fair basis.
Annuity: An annuity is a constant sum of money received or paid
each year for a given number of years.
Asset turnover: Asset turnover is a measure of how well the assets
of a business are being used to generate sales.
Avoidable costs: Avoidable costs are costs which would not be
incurred if the activity to which they relate did not exist.
Buffer stock: Buffer stock or safety stock is a basic level of stock
held to cover to cover unexpected demand or uncertainty of the
lead time for the stock item.
By-product: A by-product is a product that is produced from a
process together with other products that is of an insignificant sales
value.
Contribution: Contribution is the difference between sales value &
the marginal cost of sales.
Cost card: A cost card is a card that records the cost involved in a
particular job.
Cost centre: A cost centre can be defined as a production or
service location function, activity, or item of equipment whose cost
may be accumulated & attributed to cost units.
Cost units: A cost unit is a unit of production or a unit of activity in
relation to which a cost is measured.
Depreciation: Depreciation is the measure of the wearing out,
consumption or reduction in the useful life of a fixed asset.
Differential cost: Differential cost is the difference in total cost
between alternatives.
Direct cost: Direct costs are those costs which can be directly
identified with a specific cost unit.
Discounted Cash Flow (DCF): Discounted Cash Flow is an
investment appraisal technique that takes into account both the
timing of cash flows & also the total cash flows over a projects life.

Economic Order Quantity (EOQ): Economic Order Quantity is the

order quantity for a stock item that will minimize the combined costs
of stock ordering plus stock holding over a given period of time, say
each year.
Equivalent units: Equivalent units are notional whole units which
represent incomplete work & which are used to apportion costs
between Work In Progress (WIP) & completed output.
Fixed cost: A fixed cost is a cost which is unaffected by the level of
activity.
Full cost: Full cost or total production cost of a cost unit is its prime
or direct cost plus its share of production overheads.
Idle time: Idle time or down time is time paid for that is non-
productive.
Indirect costs: Indirect costs or overheads are expenditure which
cannot be directly identified with a specific cost unit & must be
shared out on an equitable basis.
Investment centre: Investment centre is a profit centre with
additional responsibility for capital investment & possibly for
financing & whose performance is measured by its return on
investment.
Joint costs: Joint costs or common process costs are the costs
incurred in a process that must be split or apportioned amongst the
products produced by the process.
Labour turnover: Labour turnover is a measure of the number of
the employees leaving/being recruited in a period of time expressed
as a percentage of the total labour.
Lead time: Lead time is the time difference between ordering
stocks & having them delivered.
Limiting factor: A limiting factor is a factor which limits the
organizations activity.
Margin of Safety (MOS): The difference between the budgeted
sales volume & the breakeven sales volume is known as margin of
safety.
Marginal costing: Marginal costing is the accounting system in
which variable costs are charged to cost units & fixed costs of the
period are written off in full against the aggregate contribution.
Obsolescence: Obsolescence is the loss in value of an asset
because it has been superseded.
Perpetuities: Perpetuity is a constant annual cash flow that will
continue for ever.
Present value: A present value is the amount that would need to
be invested now to earn a future cash flow.
Profit centre: A profit centre is a part of the business for which
both the costs incurred & the revenues earned are identified.
Relevant costs: A relevant cost is a future incremental cash flow
which arises as a direct result of decision.
Revenue centre: A revenue centre is a part of the organization
that earns sales revenue. Its manager is responsible for the revenue
earned but not for the costs of the operation.
Separation point: In a process manufacturing operation,
separation point is the point during manufacture where two or more
products are produced from a common process.
Stock taking: A stock taking is the counting & recording of the
physical quantities of each item of stock.
Standard cost: A standard cost is the planed unit cost of the
products produced in a period.
Standard costing: Standard costing is a control system for
comparing standard costs & revenues with actual results in a order
to report variances.
Sunk cost: Sunk costs are costs that have already been incurred or
committed. They cannot be relevant cost.

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