Chapter 2

Direct Cost

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

Indirect Cost

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

Mixed Cost

A cost that contains both variable and fixed costs.

Sunk Cost

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

Common Cost

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

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.

Engineering Approach

A detailed analysis of cost behavior based on an industrial engineers evaluation of the inputs that are required to carry out a particular activity and the prices of those inputs.

Differential Cost

A difference in cost between two alternatives.

Differential Revenue

A difference in revenue between any two alternatives.

Activity Base

A measure of whatever causes the incurrence of a variable cost.

Account Analysis

A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analysts prior knowledge of how the cost in the account behaves.

High-Low Method

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost by the change of cost in the high and low activity cost.

Least Squares Regression Method

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.

Inventorial Costs

A synonym for a product costs.

Independent Variable

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

Dependent Variable

A variable that responds to some causal factor; total cost is the dependent variable as represented by "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. Manufacturing they consist of direct materials, direct labor, and manufacturing overhead.

Manufacturing Overhead

All manufacturing costs except direct labor and indirect labor.

Contribution Approach

An income statement format that organizes cost based on its behavior. Costs are separated into variable and fixed categories, rather than being separated into product and period costs for external reporting purposes.

Incremental Cost

An increase in cost between todo alternatives.

Raw Materials

Any materials that go into the final product.

Cost Object

Anything for which cost data is desired. Ex: products, customers, jobs. and parts of organization such as department or devisions.

What are some example of conversion cost?

Assembly line workers in a plant, indirect materials, indirect labor, factory utilities, depreciation of factories and equipment. (basically everything but direct materials)

What type of cost is an airplane pilot?

Common Cost 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.

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.

What are examples of variable costs?

Cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, and selling and administrate costs such as commissions and shipping costs.

Period Costs

Costs that are taken directly to the income statement as expenses in the period which they are incurred or accrued. (All the costs that are not product cost)

Conversion Cost

Direct Labor Cost + Manufacturing Overhead Cost

Prime Cost

Direct Materials Cost + Direct Labor Cost

Direct Labor

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

What are some examples of fixed costs?

Insurance, property taxes, rent, administrative salaries, advertising

What are some example of committed fixed costs?

Investments in facilities and equipment, real-estate taxes, insurance expenses, salaries of top management

Committed Fixed Cost

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

Direct Materials

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

What are some examples of period costs?

Sales commissions, executive salaries, PR, rental cost of offices, advertising.

Indirect Materials

Small items of material such as glue and nails that maybe an integral part of a finished product but who's costs can not be easily or conveniently traced to it.

Contribution Margin

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

What is an example of an activity base?

The cost of ink for a printer. It increases as the amount being printed increases.

Indirect Labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that can not be conveniently trace to particular products.

Opportunity Cost

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

Relevant Range

The range of activity in which assumptions about variable and fixed cost behaviors are relevant.

Cost Structure

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

What are examples of selling cost?

The sales and marketing people, shipping, warehousing, and advertising.

Cost Behavior

The way in which a cost changes in the level of activity.

Discretionary/Managed Fixed Costs

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

Can the finish product of one company become the raw materials of another company?

True

Do raw materials include both indirect and direct materials?

True

What is the High-Low Method for Variable Cost

Variable Cost = (Change in Cost) / (Change in Activity)

Variable Cost

Varies in total in direct proportion based on the level of activity. Is constant per unit.

Example of Raw Material

Wood for a Desk

Equation for Mixed Cost

Y = a + bX

Y= a + bX

Y= Total Mixed Cost a= Total Fixed Cost b= The Variable Cost Per Unit of Activity X= The Level of Activity