AC 361- Chapter 1

Relevant benefit

a benefit that should be considered when making decisions

Direct cost

a cost that can be easily and conveniently traced to a specified cost object

Indirect cost

a cost that cannot be easily and conveniently traced to a specified cost object.

Sunk cost

a cost that has already been incurred and that cannot be changed by any decision made now or in the future

Common cost

a cost that is incurred to support a number of cost objects but cannot be traced to them individually. an indirect cost.

Fixed cost

a cost that remains constant, regardless of changes in the level of activity

Relevant costs

a cost that should be considered when making decisions

Differential cost

a future cost that differs between any two alternatives

Activity base

a measure of whatever causes the incurrence of a variable cost, also called cost driver

Administrative costs

all costs associated with the general management of an organization rather than with manufacturing or selling

Product cost

all costs involved in acquiring or making a product. "attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.

Selling costs

all costs that are incurred to secure customer orders and get the finished product to the customer. sometimes called order-getting and order-filling costs

Period costs

all the costs that are not product costs. all selling and administrative expenses

Contribution approach

an income statement that organizes costs by their behavior. costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes

Incremental cost

an increase in cost between two alternatives

Raw materials

any materials that go into the final product

Cost object

anything for which cost data are desired- including products, customers, plats, office locations, and departments

Finished goods

consist of completed units of product that have not yet be sold to customers

Work in process

consist of units of product that are only partially complete and will require further work before they are ready for sale to the customer

Mixed cost

contains both variable and fixed cost elements, also called semivariable costs

Manufacturing companies separate costs into 2 direct costs and 1 indirect cost

direct materials, direct labor, manufacturing overhead

Differential revenue

future revenue that differs between any two alternatives

Cost behavior

how a cost reacts to changes in the level of activity, when activity level rises and falls, a particular cost may rise and fall as well- or remain consistent

Other names for manufacturing overhead

indirect manufacturing cost, factory overhead, and factory burden

Synonym for product costs

inventoriable costs

Direct labor

labor costs that can be easily traced to individual units of product. sometimes called touch labor

Relevant range

range of activity within which the assumption that cost behavior is strictly linear is reasonably valid

Direct materials

raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product

Indirect materials

raw materials whose costs cannot be easily or conveniently traced to finished products

Indirect labor

refers to employees that play an essential role in running a manufacturing facility; however, the cost of compensating these people cannot be easily or conveniently traced to specific units of product

Committed fixed cost

represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes

Non-manufacturing costs

selling costs and administrative costs

Conversion cost

sum of direct labor and manufacturing overhead, describes direct labor and manufacturing overhead because these costs are incurred to convert direct materials into finished products

Matching principle

the accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized

Contribution margin

the amount remaining from sales revenues after all variable expenses have been deducted

Marginal cost

the cost involved in producing one more unit of product

Opportunity cost

the potential benefit that is given up when one alternative is selected over another

Cost structure

the relative proportion of each type of cost in an organization

Marginal revenue

the revenue that can be obtained from selling one more unit of product

Prime cost

the same of direct materials cost and direct labor cost

Manufacturing overhead

the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor

Discretionary fixed costs

usually arise from annual decisions by management to spend on certain fixed cost items, also called managed fixed costs

Variable cost

varies indirect proportion to changes in the level of activity