Accounting chapter 1

Nonmanufacturing costs are often divided into two categories: (.

1) selling costs and (2) administrative costs

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.

Account analysis

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

Activity base

How much are the total fixed costs?

Advertising campaign costs+ Straight-line depreciation expense on factory equipment, + Factory supervisor's salary + Factory maintenance salaries,+ Factory building rent

How much is the differential annual net operating income?

Annual increase in sales ($94,000) - Annual increase in cost of goods sold ($34,000) - Annual increase in sales commissions ($1,500) - Annual increase in shipping costs ($300) - Annual increase in depreciation expense ($11,500)+ Annual decrease in utilities cost ($2,700) - Annual increase in advertising costs ($8,100).

Variable cost is equal to (high low method )

Change in cost / change in activity

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

Committed fixed costs

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

Common cost For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any one passenger taking the flight.

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 for external reporting purposes.

Contribution approach

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

Contribution margin

Direct labor cost plus manufacturing overhead cost.

Conversion cost

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

Cost behavior

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

Cost object

The relative proportion of fixed, variable, and mixed costs in an organization

Cost structure

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

Dependent variable

A difference in cost between two alternatives.

Differential cost

The difference in revenue between two alternatives.

Differential revenue

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

Direct cost

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

Direct labor , touch labor

How much are the total variable costs?

Direct materials + Direct labor + Sales commissions + Shipping costs + Factory equipment lubrication supplies

what are Prime cost

Direct materials cost plus direct labor cost

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

Discretionary fixed costs

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.

Engineering approach

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

Fixed cost

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.

High-low method

An increase in cost between two alternatives.

Incremental cost

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

Independent variable

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

Indirect cost

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 materials

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.

Least-squares regression method

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

Opportunity cost

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

Period 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.

Product costs

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

Relevant range

How much was the net operating income?

Sales ($430,000) - Cost of goods manufactured ($239,000) + The increase in finished goods ($17,500) - Selling and administrative expenses ($80,000).

How much is Potsdam Pottery's gross margin?

Sales ($50,000) - The decrease in finished goods ($6,200) - Cost of goods manufactured ($29,000).

Use the following five-step process to perform high-low method calculations:

Step 1: Select the two periods with the highest and lowest levels of activity. Step 2: Compute the change in cost and the change in activity between the two periods. Step 3: Divide the change in cost by the change in activity to derive your estimate of the variable cost per unit. Step 4: Multiply the low (or high) level of activity by the variable cost per unit. Subtract this amount from the total cost at the low (or high) level of activity to derive the fixed portion of the mixed cost. Step 5: Use the equation Y = a + bx to estimate the total mixed cost for any level of activity within the relevant range.

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

Sunk cost

Inventoriable costs

Synonym for product costs

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

Variable cost

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling

administrative costs

To be traced to a cost object such as a particular product, the cost must be caused by the

cost object.

An decrease in cost between two alternatives.

decremental costs

Raw materials may include both

direct and indirect

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

direct materials

Most manufacturing companies separate manufacturing costs into three broad categories:

direct materials, direct labor, and manufacturing overhead.

Product costs are initially assigned to an inventory account on the balance sheet. When the goods are sold, the costs are released from inventory as

expenses

All manufacturing costs except direct materials and direct labor

manufacturing overhead

Only those costs associated with operating the factory are included in

manufacturing overhead.

contains both variable and fixed cost elements

mixed cost

the period in which a cost is incurred is_______________ the period in which cash changes hands.

not necessarily

Period costs are all the costs that are

not product costs.

The high-low and least-squares regression methods estimate the fixed and variable elements of a mixed cost by analyzing

past records of cost and activity data.

Indirect materials are part of manufacturing overhead and thus are classified as a

product cost.

total variable cost changes in

proportion to changes in the activity level.

Any materials that go into the final product.

raw materials

Contribution margin

sales - variable cost

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

selling costs

Cost behavior patterns such as salaried employees are often called

step-variable costs.

Cost behavior is considered linear whenever a is a _______________reasonable approximation for the relation between cost and activity.

straight line

raw materials refer to any materials that are used in

the final product

product costs are not necessarily treated as expenses in the period in which they are incurred. Rather, they are treated as expenses in

the period in which the related products are sold.

To find the Fixed cost (high low method )

total cost - variable cost element

an account is classified as either

variable or fixed

Mixed cost formula

y=A+b(x) y is total cost A is fixed cost b is varible cost x the level of activity

Annual increase in depreciation expense

{Annual depreciation expense on the new delivery equipment, $30,000} - {Annual depreciation expense on the old delivery equipment, $18,500}