Accounting Chapter 2
COGS for merchandising company
COGS = Beg. merchandise inventory + purchases - end. merchandise inventory
Differential cost (or revenue)
Can either be fixed or variable. Differential cost: A difference in costs between any two alternatives. Differential revenue: Difference in revenues between any two alternatives.
Sunk cost
Cost that has already been incurred and that cannot be changed by any decision made now or in the future. Should always be ignored.
Determining cost equation
Fixed cost element = total cost - (VC x activity level) Total cost = total fixed cost + total variable cost Total cost = total fixed cost + variable cost element(X) Y = a + b(x)
Opportunity cost
Potential benefit that is given up when one alternative is selected over another.
Traditional income statement
Primarily for external reporting purposes. Focuses on cost of goods sold and selling and administrative expenses. Cost of goods sold reports the PRODUCT COSTS while selling and administrative expenses reports the PERIOD COSTS. Sales Less: cost of goods sold = Gross margin Selling and administrative expenses: Selling Administrative = Net operating income
Contribution format income statement
Primarily used for internal reporting purposes. Used by managers as an internal planning and decision-making tool. Emphasis on cost behavior aids cost-volume-profit analysis. Sales Less variable expenses: COGS Variable selling Variable administrative = Contribution margin Less fixed expenses: Fixed selling Fixed administrative = Net operating income
Least-squares regression
Provides more accurate cost estimates because it uses all of the data points to fit a line that minimizes the sum of the squared errors.
Contribution margin
The amount remaining from sales revenues after variable expenses have been deducted. This amount contributes toward covering fixed expenses and then toward profits for the period. Contribution margin = sales - variable cost
High-low method
Variable cost = (cost at highest activity level - cost at lowest activity level) / (highest activity level - lowest activity level) Variable cost = change in cost / change in activity