Managerial Accounting - Chapter Two
Direct cost
A cost that can be easily and conveniently traced to a specified cost object
Indirect cost
A cost that cannot be easily and conveniently traced to a specified cost object
Mixed cost
A cost that contains both variable and fixed cost elements
Sunk costs
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 that CANNOT be traced to them individually. For example, 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.
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 changes in the level of activity. A variable cost is constant per unit
Engineering approach
A detailed analysis of cost behavior based on an industrial engineer's evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs
Differential cost
A difference in cost between two alternatives. Also see Incremental cost
Activity base
A measure of whatever causes the incurrence of a VARIABLE cost. For example, the total cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X-rays is the activity base that explains the total cost of X-ray film.
Account Analysis
A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst's PRIOR knowledge of hos 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 between the high and low activity levels.
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
Independent variable
A variable that acts as a causal factor; activity is the independent variable, as represented by the letter 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 the letter Y, in the equation Y = a + bX
What is the method used to estimate the fixed and variable components of a mixed cost where the account is classified as either a variable or fixed based on the analyst's PRIOR KNOWLEDGE
Account Analysis
Executive Compensation, General Accounting, Secretarial, Public Relations, Similar costs involved in the overall, general administration of the organization as a whole are examples of
Administrative Costs (which is a nonmanufacturing cost)
Selling costs
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. Also see Inventoriable costs.
Administrative Cost
All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling
Manufacturing overhead
All manufacturing costs except direct materials and direct labor
Which of the following (are/is) methods managers use to estimate the fixed and variable components of a mixed cost. a) Account Analysis b) Engineering Approach c) High-Low Method d) Least-Squares Regression Methods e) All of Above
All of above
Contribution approach
An INCOME STATEMENT format that organizes costs by their behavior. COST 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 two alternatives. Also see Differential cost
Raw materials
Any materials that go into the final product
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
Calculating Cost of Goods Sold for a Merchandising Company indirectly is Cost of Goods Sold =
Beginning merchandise inventory + Purchases - Ending merchandise inventory
For planning purposes FIXED COSTS can be viewed as either committed or discretionary. The following are _______________ costs. Investment in facilities and equipment Real estate taxes Insurance Expenses Salaries of Top Management
Committed Fixed Costs
Variable cost is (increased/decreased/constant) if expressed on a per unit basis
Constant PER UNIT cost of the meals remains constant at $30 even though the cost of the meals increases and decreases with activity
The following is a formula for (traditional/contribution) income statements Sales - Variable Expenses (Cost of Goods Sold, Variable Selling, Variable Administrative) = Contribution Margin - Fixed Expenses (Fixed Selling, Fixed Administrative) = Net Operating Income (Profit)
Contribution The contribution approach separates costs into fixed and variable categories
How do you derive contribution margin in the income statement contribution format?
Contribution Margin = Sales - Variable Expenses (Cost of Goods Sold - Variable Selling - Variable Administrative)
Direct Labor Cost + Manufacturing Overhead Cost = (Prime/Conversation Cost)
Conversation Cost (costs incurred to convert material into finished product)
FORMULA Conversation Cost of Manufactured Goods =
Conversation Cost of Manufactured Goods = Direct Labor Cost + Manufacturing Overhead Cost (these costs are incurred to convert material into finished product)
What is the conversion cost ? Direct materials: $69,000 Direct labor: $35,000 Manufacturing overhead: $14,000 Selling expenses: $29,000 Administrative expenses: $50,000
Conversation cost = direct labor + manufacturing overhead $35,000 + $14,000 = $49,000
______________ _______________ refers to how a cost reacts to changes in the level of activity
Cost behavior
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
Harvard Medical School has mixed and variable costs for providing X-ray services to patients. Please identify which if fixed and variable Cost of X-ray film, power, and supplies Cost of equipment depreciation Radiologists' and technicians' salaries
Cost of X-ray film, power and supplies (Variable Portion) Cost of equipment depreciation (Fixed Portion) Radiologists and technicians' salaries (Fixed Portion)
FORMULA for Calculating Cost of Goods Sold for a Merchandising Company INDIRECTLY
Cost of goods sold = Beginning merchandise inventory + Purchases = Ending merchandise inventory (Indirect Method)
FORMULA for Calculating Cost of Goods Sold for a Merchandising Company DIRECTLY
Cost of goods sold = Number of Units Sold X Unit Cost (Direct Method)
Which of the following is NOT a fixed cost Rent, Advertising, Supervisory Salaries, Cost of Meals per Guest, Property Taxes, Administrative Salaries, Straight-line depreciation
Cost of meals per guest
Period costs
Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued
If the results of the scattergraph (does/does not) depict linear cost behavior perform the high-low or least-squares regression calculation to separate the mixed cost into its variable and fixed components
DOES
If the results of the scattergraph (does/does not) depict linear cost behavior it makes no sense to proceed any further in analyzing the data
DOES NOT
Activity base is sometimes referred to as a cost ___________.
DRIVER because activity base is what cause the incurrence of a variable cost D
What is the FIRST step in applying the high-low method or the least-squares regression method?
Diagnose cost behavior with a scattergraph plot
For business decisions what cost do you use to compare cost and benefits of each alternative
Differential Cost
If the purpose of cost classification is to make decisions, the cost classification will be _______________ cost, ________________ cost and _______________ cost.
Differential cost (differs between alternatives) Sunk cost (should be ignored) Opportunity cost (foregone benefit)
Touch Labor is another term for ___________ Labor
Direct
(Direct/Indirect Administrative Cost) Salary of an accounting manger in charge of accounts receivable collections in the East region
Direct Administrative Cost
Assembly-line workers at Toyota Carpenters at the home building KB homes Electricians who install equipment on aircraft at Bombardier Learjet are examples of (Direct/Indirect Labor)
Direct Labor (Also called Touch Labor) because direct labor workers typically touch the product while it is being made
(Direct/Indirect Materials) Seats that Airbus purchase for commercial aircrafts, electronic components that Apple uses in its iPhones
Direct Materials
(Direct/Indirect Selling Cost) Cost of an advertising campaign dedicated to one specific product
Direct Selling Cost
If the purpose of cost classification is to assign cost to cost objects the cost classifications will be ____________ cost and _____________cost.
Direct cost (can be easily traced) Indirect cost (cannot be easily traced)
Conversion cost
Direct labor cost plus manufacturing overhead cost
Prime cost
Direct materials cost plus direct labor cost
Managed Fixed Cost is another term for ___________ Fixed Costs
Discretionary
For planning purposes FIXED COSTS can be viewed as either committed or discretionary. The following are ____________ costs. Advertising Research Public Relations Management Development Programs Internships for Students
Discretionary Fixed Costs Usually arise from annual decisions by management to spend on certain fixed cost items. can be cut for short periods of time with minimal damage to the long-run goals of the organization.
Income Statement - Cost of Goods Sold reports the product costs attached to the merchandise sold __________ (before/after/during) the period
During the period
What is the method used to estimate the fixed and variable components of a mixed cost where a detailed analysis of what the cost behavior SHOULD BE
Engineering Approach
TRUE or FALSE Because total fixed costs remain constant for large variations in the level of activity, the total fixed cost per unit become progressively smaller as the level of activity increases
FALSE Because total fixed costs remain constant for large variations in the level of activity, the AVERAGE fixed cost per unit become progressively smaller as the level of activity increases
TRUE or FALSE Plotting the data on a scattergraph should be performed after performing the high-low method or least-squares regression calculations
FALSE Plotting the data on a scattergraph should be performed BEFORE performing the high-low method or least-squares regression calculations
TRUE or FALSE Sunk cost is a differential cost - they can be changed by any decision
FALSE Sunk cost IS NOT a differential cost - they cannot be charged by any decision
TRUE or FALSE Traditional income statements are prepared primarily for internal business purposes
FALSE Traditional income statements are prepared primarily for external reporting purposes
TRUE or FALSE A company also incurs costs for heat and light, property taxes, insurance depreciation associated with its SELLING AND ADMINISTRATIVE FUNCTIONS and these costs ARE included as part of manufacturing overhead.
FALSE - Only costs associated with operating the factory are included in manufacturing overhead
TRUE or FALSE Company paid $50,000 for a machine several years ago. Machine used to make a product that is now obsolete. Even though in hindsight purchasing the machine may have been unwise, the $50,000 cost has already been incurred and cannot be undone. The $50,000 originally paid for the machine is an opportunity cost that should be ignored in current decisions
FALSE - it a SUNK COST
TRUE or FALSE A common cost is a type of direct cost
FALSE A common cost is a type of indirect cost (The factory manager's salary is called a common cost of producing the various products of the factory. A common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually.
TRUE or FALSE If a company pays for liability insurance in advance for two years, the entire amount is considered an expense of the year in which the payment is made
FALSE If a company pays for liability insurance in advance for two years, the entire amount is not considered an expense of the year in which the payment is made. Costs are recognized as expenses on the income statement IN THE PERIOD that benefits from the cost One-half of the cost would be recognized as an expense each year because both years benefit from the insurance payment. The unexpensed portion of the insurance payment is carried on the balance sheet as an asset called prepaid insurance.
TRUE or FALSE If a cost is incurred to acquire or make a product that will eventually be sold, the cost is recognized as a expense when the product is acquired/made.
FALSE If a cost is incurred to acquire or make a product that will eventually be sold, the cost is recognized as an EXPENSE WHEN THE SALE TAKES PLACE (WHEN THE BENEFIT OCCURS)
TRUE or FALSE Manufacturing costs consist of Direct Materials, Direct Labor, and Administrative Costs
FALSE Manufacturing costs consist of Direct Materials (direct cost), Direct Labor (direct cost) and Manufacturing Overhead (indirect materials, indirect labor)
True or False Manufacturing overhead includes all manufacturing costs - direct materials and direct labor
FALSE Manufacturing overhead includes all manufacturing costs EXCEPT direct materials and direct labor e
TRUE or FALSE Matching principle is based on the accrual (accrued means accumulate/collect) concept that costs incurred to generate a particular revenue should be recognized as expenses in the following period that the revenue is recognized
FALSE Matching principle is based on the accrual (accrued means accumulate/collect) concept that costs incurred to generate a particular revenue should be recognized as expenses in the SAME PERIOD that the revenue is recognized
TRUE or FALSE Nonmanufacturing Costs consist of Direct Materials and Direct Labor
FALSE Nonmanufacturing Costs consist of Selling Costs and Administrative Costs
TRUE or FALSE Nonmanufacturing Costs consists of direct and indirect labor
FALSE Nonmanufacturing costs consists of Selling costs and Administrative costs
TRUE or FALSE Period costs are included as part of the cost of either purchased or manufactured goods
FALSE Period costs ARE NOT included as part of the cost of either purchased or manufactured goods
TRUE or FALSE Product costs are recorded as expenses on the income statement in the period in which they are incurred
FALSE Product costs are NOT necessarily recorded as expenses on the income statement in the period in which they are incurred. They are recorded as expenses IN THE PERIOD in which the RELATED PRODUCTS ARE SOLD
TRUE or FALSE Product costs are initially assigned to an inventory account on the income statement
FALSE Product costs are initially assigned to an inventory account on the BALANCE SHEET
TRUE or FALSE When the goods are sold, the costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales and revenues on the balance sheet
FALSE When the goods are sold, the costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales revenue on the INCOME STATEMENT
TRUE or FALSE When preparing a balance sheet and an income statement companies need to classify their cost as direct and indirect cost
FALSE cost are classified as direct and indirect costs when assigning costs to cost objects Answer is product costs (inventoriable) and period cost( expensed) Period: Balance Sheet Dec. 31, 2016 Income Statement for year ending in Dec 31, 2016
(Fixed/Variable) cost remains constant, in total regardless of the changes in the level of activity
FIXED Fixed cost remains CONSTANT, in TOTAL, regardless of the changes in the level of activity
Direct labor
Factory labor costs that can be easily traced to individual units of product. Also called TOUCH LABOR
Income Statement - The selling and administrative expenses report all product cost that have been expensed as incurred (True or False)
False: The selling and administrative expenses report all PERIOD cost that have been expensed as incurred
As the activity rises and falls and the cost remain constant - cost is said to be a __________ cost.
Fixed
In a mixed cost the portion that represents the minimum cost of having a service ready and available for use is the _______________(fixed/variable) portion
Fixed
Which ARE NOT a cost classification for DECISION MAKING Differential cost (differs between alternatives) Variable cost (proportional to activity) Sunk cost (should be ignored) Fixed Cost (constant in total) Opportunity Cost (foregone benefits)
Fixed and Variable Costs are cost classificatinos used for predicting cost behavior in response to changes in activity Differential cost, Sunk cost, Opportunity cost are cost classifications used for making decisions
For a merchandising company cost of goods sold is a (variable/fixed) cost that gets included in (variable/fixed) expense portion of the contribution format income statement.
For a merchandising company cost of goods sold is a VARIABLE cost that gets included in the VARIABLE expense portion of the contribution format income statement
(High-Low Method or Least-Squares Regression Analysis) Which one is very easy to apply but it suffers from a major (and sometimes critical) defect it utilizes only two datapoints which is not enough to produce accurate results
High -Low Method
What are the methods used to estimate the fixed and variable components of a mixed cost where PAST RECORDS OF COST AND ACTIVITY DATA are analyzed
High-Low Method and Least-Squares Regression Method
(Direct/Indirect Administrative Cost) Salary of a chief financial officer who oversees all of a company's regions
Indirect Administrative Cost
Labor costs of janitors, supervisors, material handlers, and night security guards are examples of (direct/indirect labor)
Indirect Labor: cannot be traced to particular products, or that can be traced only at great cost and inconvenience
(Direct/Indirect Materials) Solder used to make electrical connections in a Samsung HDTV, glue to assemble an Ethan Allen chair
Indirect Materials
Manufacturing Overhead includes: (choose) a)Indirect Materials b)Direct Labor c) Indirect Labor d) Direct Materials e) Administrative Expenses f) Selling Expenses
Indirect Materials and Indirect Labor
(Direct/Indirect Selling Cost) The salary of a marketing manager who oversees numerous products vs. individual products
Indirect Selling Cost
Committed fixed costs
Investments in facilities, equipment and basic organizational structure that CAN'T be significantly reduced even for short periods of time without making fundamental changes.
(High-Low Method or Least-Squares Regression Analysis) Which method uses all the data to separate the mixed cost into its fixed and variable components
Least-Square Regression Analysis
(High-Low Method or Least-Squares Regression Analysis) Which one is generally more accurate
Least-Squares Regression Analysis The reason is it uses all the data points vs relying on just two data points (high-low method)
Indirect manufacturing cost, factory overhead, factory burden are other names for _________________ _________________.
Manufacturing Overhead
If the purpose of cost classification is to account for costs in manufacturing companies the cost classification will be ______________ costs and ________________ costs.
Manufacturing costs (consist for direct materials, direct labor and manufacturing overhead. Manufacturing overhead is further divided into indirect materials and indirect labor) Nonmanufacturing costs (consists of selling costs and administrative cost)
Accountants use differential cost compared to Economist's _________________ cost.
Marginal Economists uses marginal cost and marginal revenue to speak of changes in cost and revenue. Revenue obtained from selling one more unit of product = MARGINAL REVENUE Cost involved in producing one more unit of product = MARGINAL COST Applied to a single unit of output - economist's marginal concept = accountant's differential concept
Direct materials
Materials that become an integral part of a finished product and whose costs CAN be conveniently traced to it
Lowe's and Home Depot are examples of (manufacturing/merchandising) companies
Merchandising Because they buy finished products from manufacturers and then resell them to the end consumers
Y = a + bX is the equation for ________ _________
Mixed Cost
Y = a + bX is the equation for _____________ ____________. What does X mean?
Mixed Cost X is the level of activity
Y = a + bX is the equation for ___________ __________. What does the (a) mean?
Mixed Cost a is the total fixed cost (the vertical intercept of the line)
Y = a + bX is the equation for ______________ _____________. What does the (b) mean?
Mixed Cost b is the variable cost per unit of activity (the slope of the line)
Semivariable costs is another name for ___________ costs
Mixed Costs
SG&A or just selling and administrative cost is another name for ___________ ______________
Nonmanufacturing costs
Executive Compensation, General Accounting, Secretarial, Public Relations are examples of _______________ _________________. (manufacturing/nonmanufacturing costs)
Nonmanufacturing costs (also known as SG&A selling, general and administrative or just selling and administrative costs)
You have a part-time job while attending college that pays $200 per week. If you spend one week at the beach during spring break without pay, then the $200 in lost wages would be an _____________ cost of taking one week off to be at the beach
Opportunity
FORMULA Period Cost of Manufactured Goods =
Period Cost of Manufactured Goods = Selling Expenses + Administrative Expenses
What is the period cost ? Direct materials: $69,000 Direct labor: $35,000 Manufacturing overhead: $14,000 Selling expenses: $29,000 Administrative expenses: $50,000
Period cost = selling expenses + administrative expenses (costs that are not product costs) $29,000 + $50,000 = $79,000
Direct Material Cost + Direct Labor Cost = (Prime/Conversion Cost)
Prime Cost
FORMULA Prime Cost of Manufactured Goods =
Prime Cost of Manufactured Goods = Direct Materials + Direct Labor
What is the prime cost ? Direct materials: $69,000 Direct labor: $35,000 Manufacturing overhead: $14,000 Selling expenses: $29,000 Administrative expenses: $50,000
Prime cost = direct materials + direct labor $69,000 + $35,000 = $104,000
Inventoriable cost is another word for _________ cost
Product
Direct materials + Direct labor + Manufacturing overhead =
Product Cost
FORMULA Product Cost of Manufactured Goods =
Product Cost of Manufactured Goods = Direct Materials + Direct Labor + Manufacturing Overhead
What is the product cost ? Direct materials: $69,000 Direct labor: $35,000 Manufacturing overhead: $14,000 Selling expenses: $29,000 Administrative expenses: $50,000
Product cost = Direct materials + Direct labor + Manufacturing overhead = $69,000 + $35,000 + $14,000 = $118,000
If the purpose of cost classification is to prepare financial statements the cost classification will be __________ costs and ___________ costs
Product costs (inventoriable) Period costs (expensed)
Raw materials may include both _________ and __________ materials.
Raw materials may include both direct and indirect materials. DIRECT MATERIALS: important part of the finished product and costs can be conveniently traced to the finished product. INDIRECT MATERIALS: relatively insignificant materials to end products
_________________ _________________ is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid
Relevant Range
Southwest Airlines has mixed and variable costs for maintenance. Please identify which is fixed and variable Renting Maintenance Facilities Cost of replacement parts, lubricating oils Payroll for skilled mechanics
Renting Maintenance Facilities(Fixed Portion) Cost of replacement parts, lubricating oils (Variable Portion) Payroll for skilled mechanics (Fixed Portion)
FORMULA Income Statement
Sales - Cost of Goods Sold = Gross Margin - Selling and Administrative Expenses = Net Operating Income (Profit)
All selling and administrative expenses are treated as period costs. Please identify whether each of the below as selling costs or administrative costs Sales Commissions Advertising Executive Salaries Public Relations Rental Costs of Administrative Offices
Sales Commissions (selling cost) Advertising (selling cost) Executive Salaries (administrative costs) Public Relations (administrative costs) Rental Cost of Administrative Offices (administrative cost)
Advertising, Shipping, Sales Travel, Sales Commissions, Sales Salaries, Cost of Finished Goods, Warehouses are examples of (Direct Materials/Indirect Labor/Selling Costs)
Selling Costs
Order-getting and Order-filling costs are other names for _____________ _____________
Selling Costs
Indirect materials
Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it
Inventoriable costs
Synonym for product costs
TRUE or FALSE Only differential costs are relevant in a decision, sunk cost should always be ignored
TRUE
TRUE or FALSE Opportunity costs ARE NOT found in accounting records, but must be considered in decisions managers make
TRUE
TRUE or FALSE As activity level rises and falls, total fixed costs remain constant unless influenced by some outside force like landlord increasing your monthly rental expense
TRUE
TRUE or FALSE Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable
TRUE
TRUE or FALSE Period Costs are the costs that are not Product Costs
TRUE
TRUE or FALSE Period costs are expensed on the income statement IN THE PERIOD in which they are incurred using the usual rules of accrual accounting
TRUE
TRUE or FALSE Product costs "attach" to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale
TRUE
TRUE or FALSE The Traditional Income Statement is useful for external reporting purposes, BUT has serious limitations when used for internal purposes
TRUE It does not distinguish between fixed and variable cost. Internally, managers need cost data organized by cost behavior to aid in planning, controlling and decision making The Contribution Format Income Statement has been developed in response to these needs
TRUE or FALSE Incremental Cost is the SAME as Differential cost BUT includes both cost increases (incremental costs) and cost decreases (decremental costs) between alternatives
TRUE Differential revenue - difference in revenues (usually just sales) between any two alternatives
TRUE or FALSE Management accountants assume that costs are strictly linear - the relationship between cost on the one hand and activity on the other can be represented by a straight line
TRUE Economists point out many costs are actually curvilinear (the relationship between cost and activity is a curve. Even if a cost is not STRICTLY linear it can be approximated within a narrow band of activity
TRUE or FALSE The period in which a cost is incurred is not necessarily the period in which cash changes hands
TRUE Example - the costs of liability insurance are spread across the periods that benefit from the insurance regardless of the period in which the insurance premium is paid
TRUE or FALSE (Raw Materials) A final product of one company may be a raw material of another company
TRUE Plastics produced by Du Pont are a raw material used by Hewlett-Packard in its personal computers
TRUEorFALSE A particular cost may be direct or indirect depending on the cost object
TRUE: While the Campbell Soup factory manager's salary is an indirect cost of manufacturing chicken noodle soup, it is a direct cost of the manufacturing division
Income Statement, the Cost of Goods Sold reports the _______________ costs attached to the merchandise sold (before/after/during) the period
The Cost of Goods Sold reports the PRODUCT cost attached to the merchandise sold DURING the period
Contribution margin
The amount remaining from sales revenues AFTER all variable expenses have been deducted
Differential revenue
The difference in revenue between two alternatives
Indirect labor
The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced 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 within which assumptions about variable and fixed cost behavior are valid
Cost structure
The relative proportion of fixed, variable, and mixed costs in an organization
Income Statement, the selling and administrative expenses report all ____________ cost that have been expensed AS INCURRED.
The selling and administrative expenses report all PERIOD cost that have been expenses AS INCURRED.
Cost behavior
The way in which a cost reacts to changes in the level of activity
Discretionary fixed costs
Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research
(Total/Per Unit Variable cost ) change as the activity level changes
Total Variable Cost Change as the Activity Level Changes Total Variable Cost rises as the activity level rises (an activity level of 250 guests, total meal costs is $7,5000; an activity level of 100 guests, total meal cost is $30,000)
The following formula is a (traditional/contribution) format for merchandising companies Sales - Cost of Goods Sold = Gross Margin -Selling and Administrative Expenses = Net Operating Income (Profit)
Traditional Income Statement
Calculating Cost of Goods Sold for a Merchandising Company directly is Number of Units sold X __________________
Unit Cost
As the activity rises and falls and the costs rises and falls - cost is said to be a ___________ cost
Variable
In a mixed cost the portion that represents the cost incurred for actual consumption of the service, thus it varies in proportion to the amount of service actually consumed (fixed/variable) portion
Variable
FORMULA: High-Low Method
Variable Cost = Change in cost/Change in activity
If the purpose of cost classification is to predict cost behavior in response to changes in activity, the cost classification will be ___________ cost, __________ cost, ___________ cost.
Variable cost (proportional to activity) Fixed cost (constant in total) Mixed cost (has variable and fixed elements)
Predicting behavior of cost within the relevant range What happens to fixed cost per unit
Within the relevant range, FIXED COST PER UNIT decreases as the activity level rises and increases as the activity level rises
Predicting behavior of cost within the relevant range What happens to total fixed cost
Within the relevant range, TOTAL FIXED COST is NOT affected by changes in the activity level within the relevant range
Predicting behavior of cost within the relevant range What happens to total variable cost
Within the relevant range, TOTAL variable cost INCREASES and DECREASES in proportion to changes in the activity level
Predicting behavior of the cost within the relevant range What happens to variable cost per unit
Within the relevant range, variable cost PER UNIT remains CONSTANT
FORMULA: Mixed Costs
Y = a + bX Y = The total mixed cost a = The total fixed cost (the vertical intercept of the line) b = The variable cost per unit of activity (the slope of the line) X = the level of activity
Manufacturing overhead includes items such as: a) Indirect materials b) Indirect labor c) Maintenance and repairs on PRODUCTION EQUIPMENT d) Heat and light, Property taxes, Depreciation, Insurance for the sales force Which one needs correction
d) Should be Heat and light, Property taxes, Depreciation, Insurance on manufacturing facilities
The difference between traditional and contribution income statements is ____________ and ___________ costs.
fixed and variable costs
TRUE or FALSE In the mixed cost equation, focused on variable cost per unit which = the slope of the straight line. The steeper the slope, the lower the variable cost per unit
the steeper the slope, the HIGHER the variable cost per unit
