AC222 Midterm

Cost Equation

formula that a company can use to predict the expenses associated with the production and sale of a certain amount of goods. The formula typically incorporates constant overhead costs as well as variable costs that depend on the volume of sales.

Behavior of Costs

learning how costs change when there is a change in an organization's level of activity. The costs which vary proportionately with the changes in the level of activity are referred to as variable costs

Contribution Format

selling price per unit minus the variable cost per unit

Segment

A part or activity of an organization about which managers could like cost, revenue, or profit data

Internal Control

A process designed to provide a reasonable assurance that objectives are being achieved

Predetermined overhead rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period.

Contribution Margin Ratio

A ratio computed by dividing contribution margin by dollar sales

Variable Expense Ratio

A ratio computed by dividing variable expense by dollar sales

Business Process

A series of steps that are followed in order to carry out some task in a business

Independent Variable

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

Dependent Variable

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

Selling Cost

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.

Administrative Costs

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

Manufacturing Cost

All manufacturing costs except direct materials and direct labor.

Activity Base

An event that causes the consumption of manufacturing overhead resources.

Incremental Cost

An increase in cost between the high and low activity levels

Conversation Cost

Direct labor cost plus manufacturing overhead cost

Direct Labor

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

Breakeven point

The level of sales at which profit is zero

Value Chain

The major business functions that add value to a company's products or services, such as research and development, product design, manufacturing, marketing, distribution, customer service

Cost of Goods Manufactured

The manufacturing costs associated with the goods that were finished during the period.

Opportunity Cost

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

Control

The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change

Relevant Range

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

Cost Structure

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

Cost Behavior

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

Discretionary Fixed Cost

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

Discretionary

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

Finished goods

Units of product that have been completed but not yet sold to customers

Just-In-Time (JIT)

denoting a manufacturing system in which materials or components are delivered immediately before they are required in order to minimize inventory costs

Gross Margin

difference between revenue and cost before accounting for certain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold

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

Direct Cost

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

Sunk Cost

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

Common Costs

A cost that is incurred to support a number of cost objects but cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilots wage is caused by any one passenger taking the flight.

Fixed Cost

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 Cost

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

Absorption Costing

A costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of the product.

Job Order Costing

A costing system used in situations where many different products, jobs, or services are produced each period.

Overapplied overhead

A credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to Work in Progress exceeds the amount of overhead cost actually incurred during a period.

Under applied overhead

A debit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period.

Differential Cost

A difference in cost between two alternatives

Cost Driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Cost Volume Profit Graph

A graphical representation of the relationship between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand

Lean Production

A management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders.

Allocation Base

A measure of activity such as direct labor hours or machine hours that is used to make a product.

Step Function Cost

An item of expenditure that when plotted on a graph against activity levels gives a stepped function; i.e. increments of cost are incurred as activity rises.

Cost Object

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

Cost Object

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.

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.

Period Cost

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

Committed Fixed Cost

Increments 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

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

Direct Materials

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

Mixed Cost

Semi-variable cost is an expense which contains both a fixed-cost component and a variable-cost component.

Contribution Margin

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