Managerial Accounting Chapter 2

Direct cost

A cost that can be easily and conveniently traced to a specific cost object

Indirect cost

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

Mixed Cost

A cost that contains both variable and fixed cost elements

Common Costs

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. IE: wage cost of a pilot to all of the passengers.

Variable Cost

A cost that varies, in total, in direct proportion to changes in the level of activity. Constant per unit.

Engineering approach

A detailed analysis of cost behavior based on an industrial engineer's eval of the inputs that are required to carry out a particular activity and of the prices of those inputs

Activity Base

A measure of whatever causes the incurrence of a variable cost. IE a total cost of an Xray film in a hospital will increase as the number of Xrays taken increases.

Account Analysis

A method for analyzing cost behavior in in which an account is classified as either variable or fixed based on prior knowledge.

High low method

A method of separating a mixed cost into its fixed and variable elements.

Linear Cost Behavior

Cost behavior is said to be linear whenever a straight line is reasonable approximation for the relation between cost and activity.

Sunk Cost

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

Fixed cost

Cost that remains constant in total, regardless of changes in the level of activity within the relevant range.

Period Costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued.

Conversion cost

Direct labor costs plus manufacturing overhead

Prime Cost

Direct material cost plus direct labor cost

Direct labor

Factory labor costs that can be easily traced to individual units of product.

Discretionary Fixed Costs

Fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.

Direct Materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

Indirect materials

Small items of material such as glue, and nails that may be an integral part of finished product, but not easily or conveniently traced to it.

True

T/F A mixed cost has a minimum cost of having a service available and ready for use.

True

T/F Compared to traditional statements, contribution format statements provide management with a tool to make decision making easier.

False

T/F Management cannot use accounting analysis when trying to estimate the components of mixed cost.

True

T/F Nonmanufacturing costs are period costs

True

T/F Period costs are expensed in the same period in which they are incurred.

True

T/F The equation for a straight-line can be used to express the relationship between mixed costs and the level of activity.

False (within the range)

T/F The equation for a straight-line makes it easy to calculate the total mixed cost for any activity level outside the relevant range.

False

T/F The fixed portion of mixed cost represents the cost incurred for the actual consumption of a service.

False

T/F The traditional income statement is for internal use, while the contribution format income statement is for external.

True

T/F Traditional income statements focus on cost function. Contribution format statements focus on cost behavior.

True

T/F When Mixed costs are represented by a straight-line, the steeper the slope, the higher the variable cost per unit.

Contribution Margin

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

Differential Cost

The difference in cost between two alternatives.

Indirect labor

The labor costs of janitors, supervisors, material handlers, and other factory workers that cannot be easily or conveniently traced to it.

Relevant Range

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Variable cost per unit

When using high low method, the change in cost divided by the change in units equals

Variable

When using the high-low method, the slope of the line equals the ____ cost per unit of activity.

Discretionary, committed

_____ fixed costs can be cut-back or eliminated without significant damage to goals. _____ fixed costs are not easily changed or eliminated.

Cost Behavior

the way in which a cost reacts to changes in the level of activity

Selling costs

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer.

Product costs

All costs that are involved in acquiring or making a product. Direct materials, direct labor, and manufacturing overhead.

Administrative Costs

All executive, organizational, and clerical, costs associates with the general management of an organization rather than with manufacturing/selling.

Manufacturing Overhead

All manufacturing costs except direct materials and direct labor.

Contribution Approach

An income statement format that organizes costs by their behavior. costs are separated into variable and fixed categories rather than being separated into product and period costs.

Incremental cost

An increase in cost between two alternatives.

Cost object

Anything for which cost data are desired. Examples are products, customers, jobs, and parts of the organization such as departments

sales revenue variable cost

Contribution margin is ____ - ____

Product cost

Inventoriable costs are also known as

Committed Fixed Costs

Investments in facilities, equipment, and basic organizational structure that can't be significantly reduced even for short periods of time without making fundamental changes.