Key Terms

absorption costing

(also, full costing) system of accounting where all costs are treated as product costs regardless of whether they are variable or fixed

activity base

activity that has been considered to be a primary driver of overhead costs and for which, traditionally, direct labor hours or machine hours were used

activity-based costing

process of assigning overhead to products based on the cost driver for each activity cost pool

batch-level cost

one that is incurred when a group (or batch) of items is produced

common fixed costs

expenses that are shared among all divisions or production units and include such costs as the CEO salary and corporate headquarter costs

cost driver

activity that is the reason for the increase or decrease of another cost; examples include labor hours incurred, labor costs paid, amounts of materials used in production, units produced, or any other activity that has a cause-and-effect relationship with incurred costs

cost pool

accumulation of costs that are incurred during the production of the activities included in the activity cost pool

direct labor

labor directly related to the manufacturing of the product or the production of a service

direct materials

materials used in the manufacturing process that can be traced directly to the product

expense recognition principle

(also, matching principle) matches expenses with associated revenues in the period in which the revenues were generated

factory-level cost

one that is incurred when production occurs, such as production supervisor salary

indirect labor

labor not directly involved in the active conversion of materials into finished products or the provision of services

indirect materials

materials used in production but not efficiently traceable to a specific unit of production

manufacturing overhead costs

all manufacturing costs excluding direct material and direct labor

product-level cost

one that occurs as support of the product, such as engineering

traditional allocation

allocation of factory overhead to products based on the volume of production resources consumed

unit-level cost

one that is incurred for each unit produced

variable costing

(also, direct costing or marginal costing) system of accounting where only variable costs are treated as product costs