Accounting 202 Chapter 2

The salary of a sales personnel in a company is structured as a monthly base salary of $3,000, plus an additional $100 on each sale made. If the person makes 15 sales in a month, what is the total mixed cost associated with this salesperson?

$4,500

In a small manufacturing facility, one welder is needed for every 200 hours of machine-hours or fewer in a month. The welder is paid a monthly salary of $2,500. If the total monthly requirement is 1,300 machine-hours, what would be the total salaried employee expense?

$17,500 (6.5 rounds to 7 since cant have 6.5 workers and they are not paid per hour, rather per mo.)

a variable unit ________ in total and remains _________ per unit

1. varies, 2. constant

mixed costs

A cost that contains both variable and fixed cost elements: Y = a + bX

fixed costs

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity.

Variable Costs

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit. Must be variable with respect to something (activity base)

engineering approach

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

differential cost

A difference in cost between two alternatives. Also see Incremental cost. AKA

activity base

A measure of whatever causes the incurrence of a variable cost. For example, the total cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X-rays is the activity base that explains the total cost of X-ray film.

account analysis

A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves.

high-low method

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels.

least-squares regression method

A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimizes the sum of the squared errors.

independent variable

A variable that acts as a causal factor; activity is the independent variable, as represented by the letter X, in the equation Y = a + bX.

dependent variable

A variable that responds to some causal factor; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX.

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. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Also see Inventoriable costs. Initially assigned to inventory expense

Manufacturing OH

All manufacturing costs except direct materials and direct labor.

raw materials

Any materials that go into the final product.

Cost object

Anything for which cost data is desired- including products, customers, jobs, etc

High Low method formula

Change in cost / Change in activity

linear cost behavior

Cost behavior is said to be linear whenever a straight line is a 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.

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 cost plus manufacturing overhead cost.

Prime Cost

Direct materials cost plus direct labor cost. (not discussed in class maybe not as rel.)

direct labor

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

In Y = a + bX what does a represent

Level of activity

Direct Materials

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

contribution margin

Sales rev minus variable expenses

Nonmanufacturing Costs

Selling Costs and Admin Costs

mixed costs are also known as

Semi-variable costs

indirect materials

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

indirect labor

TOUCH LABOR The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

differential rev

The difference in revenue between two alternatives.

opportunity cost

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

relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid. "Is a fixed cost strictly fixed?"

cost structure

The relative proportion of fixed, variable, and mixed costs in an organization; costs are often categorized as variable, fixed, or mixed.

Cost behavior

The way in which a cost reacts to changes in the level of activity. Mgr must be able to anticipate these

what is the mixed cost formula?

Y = a + bX