Accounting Learning Objectives

2-16 Define the following terms: differential cost, opportunity cost, and sunk cost.

differential cost-A difference in cost between two alternatives. opportunity cost - is the benefit sacrificed when rejecting a course of action. sunk costs-cost that cannot be changed because it has already been incurred

2-2 Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect labor, and (e) manufacturing overhead.

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2-13 What is meant by the term least-squares regression?

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.

2-4 Distinguish between (a) a variable cost, (b) a fixed cost, and (c) a mixed cost.

A variable cost varies, in total, in direct proportion to changes in the level of activity. A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. A mixed cost contains both variable and fixed cost elements (expeditons).

2-7 What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.

Activity base is a measure of whatever causes the incurrence of a variable cost. Activity base is a measure for variable cost. (Units produced, service calls, units sold, # of cups...)

2-1 What are the three major elements of product costs in a manufacturing company?

Direct material. Direct Labor. Manufacturing overhead.

2-5 What effect does an increase in volume have on— a) Unit fixed costs? b) Unit variable costs? c) Total fixed costs? d) Total variable costs?

Fixed cost per unit decreases. variable cost per unit stays the same. Total fixed cost stays the same. Total variable cost increases.

2-12 Give the general formula for a mixed cost. Which term represents the variable cost? The fixed cost?

The formula for a mixed cost is Y = a + bX. In cost analysis, the "a" term represents the fixed cost and the "b" term represents the variable cost per unit of activity.

2-8 Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear?

The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range

2-3 Explain the difference between a product cost and a period cost.

The matching principle is based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized. This means that if a cost is incurred to acquire or make something that will eventually be sold, then the cost should be recognized as an expense only when the sale takes place Such costs are called product costs. period costs are all the costs that are not product costs.

2-11 What is the major disadvantage of the high-low method?

What is the major disadvantage of the high-low method? The high-low method uses only two points to determine a cost formula. These two points are likely to be less than typical because they represent extremes of activity.

2-10 Does the concept of the relevant range apply to fixed costs? Explain.

Yes, as the level of activity change, the level of fixed costs need to change to support the operation

2-9 Distinguish between discretionary fixed costs and committed fixed costs.

A discretionary fixed cost has a fairly short planning horizon—usually a year. Such costs arise from annual decisions by management to spend on certain fixed cost items, such as advertising, research, and management development. A committed fixed cost has a long planning horizon—generally many years. Such costs relate to a company's investment in facilities, equipment, and basic organization. Once such costs have been incurred, they are "locked in" for many years.

2-6 Define the following terms: (a) cost behavior and (b) relevant range.

Cost behavior- is the way in which a cost reacts to changes in the level of activity. Relevant range- Range of activity within which assumptions about variable and fixed are valid.

2-17 Only variable costs can be differential costs. Do you agree? Explain

No. they are not the same things. Differential costs are ones that differ between different alternatives. However, variable costs are simply ones that vary with different activity levels. They do not necessarily differ between alternatives.

2-14 What is the difference between a contribution format income statement and a traditional format income statement?

The contribution approach income statement organizes costs by behavior, first deducting variable expenses to obtain contribution margin, and then deducting fixed expenses to obtain net operating income. The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled

2-15 What is the contribution margin?

The contribution margin is total sales revenue less total variable expenses.