Chapter 25 Accounting Terms

activity-based costing (ABC)

A cost allocation method that identifies activities causing the incurrence of costs and allocates the costs to products (or other cost objects), based on activity drivers (bases).

sunk cost

A cost that is not affected by subsequent decisions.

theory of constraints (TOC)

A manufacturing strategy that attempts to remove the influence of bottlenecks (constraints) on a process.

markup

An amount that is added to a cost amount to determine product price.

total cost concept

A concept used in applying the cost-plus approach to product pricing in which all the costs of manufacturing the product plus the selling and administrative expenses are included in the cost amount to which the markup is added.

product cost concept

A concept used in applying the cost-plus approach to product pricing in which only the costs of manufacturing the product, termed the product cost, are included in the cost amount to which the markup is added.

variable cost concept

A concept used in applying the cost-plus approach to product pricing in which only the variable costs are included in the cost amount to which the markup is added.

production bottleneck

A condition that occurs when product demand exceeds production capacity.

opportunity cost

The amount of income forgone from an alternative to a proposed use of cash or its equivalent.

differential cost

The amount of increase or decrease in cost expected from a particular course of action compared with an alternative.

differential revenue

The amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative.

differential analysis

The area of accounting concerned with the effect of alternative courses of action on revenues and costs.

differential income (or loss)

The difference between the differential revenue and the differential costs.

target costing

The target cost is determined by subtracting a desired profit from a market method determined price. The resulting target cost is used to motivate cost improvements in design and manufacture.