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