ACCT 2020 Ch 2

high low method

(Y2-Y1)/(X2-X1). The period with the lowest activity is selected as the first point in the above formula and the period with the highest activity is selected as the second point. The formula changes to (cost at the high activity level-cost at the low activity level)-(high activity level-low activity level) or change in cost/change in activity. It should only be used if a scattergraph plot indicates a linear relationship between cost and activity. It only uses two data points.

fixed cost element

=total cost-variable cost element

sunk cost

a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Not differential costs. It is therefore never relevant and should be disregarded when making decisions

Fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity. (straight-line depreciation, insurance, advertising). Using the high low method it is calculated by either using the high or low level of activity and after the variable cost is calculated

differential cost

a difference in costs between any two alternatives

differential revenue

a difference in revenues (usually just sales) between any two alternatives

cost behavior is considered linear whenever

a straight line approximates the relationship between cost and activity

discretionary fixed cost

advertising and management training programs . Usually arise from annual spending decisions by management

administrative costs

all costs associated with the general management of an organization rather than with manufacturing or selling (general accounting)

product costs

all costs involved in acquiring or making a product. In the case of manufactured goods these costs consist of direct materials, direct labor,, and manufacturing overhead. These attach to units of prods as the goods. Not recorded when incurred, but when sold

selling costs

all costs that are incurred to secure customer orders and get the finished product to the customer. Sometimes called order getting and order filling costs (sales commissions advertising)

period costs

all costs that are not product costs. All selling and administrative expenses are treated as this. Nonmanufacturing costs are period costs. Period costs are expensed in the same period as they are incurred

Scatter-graphs

are a way to diagnose cost behavior and plotting data on a scatter-graph is an important diagnostic step

mixed cost

both variable and fixed cost elements. Also known as semivariable costs. Has a minimum cost of having a service available and ready for use. When they are represented by straight-line, the steeper the slope, the higher the variable cost per unit.

straight line

can be used to express the relationship between mixed costs and the level of activity

step variable cost

cost behavior patterns such as salaried employees. Generally narrow so the costs can be treated essentially as variable cost for most purposes. Can be adjusted quickly as conditions change.

indirect cost

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

common cost

cost that s incurred to support a number of cost objects but cannot be traced to them individually. Type of indirect cost incurred to benefit more than one cost object

cost objectives

customers, organizational sunbunlts, and anything for which cost data is desired. May be assigned costs to help control spending

contribution margin

deducting variable expenses from sales to obtain this. The amount remaining from sales revenues after variable expenses have been deducted. This amount contributes toward converting fixed expenses and then toward profits for the period

committed fixed costs

fixed costs that cannot easily be changed and often lock a company into a multi-year decision. Insurance expense

direct labor

labor costs that can be easily (physically and conveniently) traced to individual units of product (assembly line workers, carpenters)

indirect labor

labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience (janitors and night security guards)

manufacturing overhead

manufacturing costs except direct materials and direct labor. Includes indirect materials indirect labor, maintenance, and repairs on production equipment, heat and light

indirect materials

materials that are included as part of manufacturing (solder and glue)

direct materials

materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product

an activity base

measures whatever causes costs to vary is sometimes called a cost driver

common activity bases

number of purchase orders, direct labor hours, and machine hours

inventoriable costs

product costs that are initially assigned to inventories

contribution approach

provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids planning, controlling and decision making. Separates costts into fixed and variable categories

relevant range

range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.

nonmanufacturing costs

selling costs and administrative costs

In the equation y=a+bx, what is x

the level of activity

cost structure

the relative proportion of each type of cost in an organization

In the equation y=a+bx, what is a

the total fixed cost (vertical intercept)

In the equation y=a+bx, what is y

the total mixed cost

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

the variable cost per unit

In the equation y=a+bx, what is b

the variable cost per unit of activity (slope)

manufacturing costs

usually separated into three direct cost categories: direct materials and direct labor and manufacturing overhead

variable cost

varies in total, in direct proportion to changes in the level of activity. (Cost of goods sold and indirect materials or shipping costs). On a per unit basis but they increase in total withing the relevant range of activity. In the high low method it is calculated as the change in cost divided by change in activity