Accounting 202
Cost behavior is considered linear whenever:
A straight line approximates the relationship between cost and activity
Product cost
All cost involved in acquiring or making a product Ex: direct labor, direct material, and manufacturing overhead
Absorption cost
All manufacturing cost, both fixed and variable - most common approach to product costing through the world - use in management reports
Cost structure
The relative proportion of each type of cost in an organization
Variable cost
Type of cost change in total, in direct proportion to change in the level of activity
Mixed cost
- Contain both variable and fixed cost elements. - also known as semi-variable cost
Unit product cost
- average product cost per unit - total job cost divided by number of units
Mnufacturing cost
- direct materials - direct labor - manufacturing overghead
Direct cost
A cost that can be easily and conveiently traced to a specific cost object
Normal cost system
Applies overhead to jobs by multiplying a predetermined overhead rate by the actual amount of the allocated base incurred by the jobs
Direct labor
Can be easly and conveniently traced to specific product
Marginal cost
Cost involven in producing one more unit of product
Selling cost
Cost that are incurred to secure customer orders and get the finish product to the customers. Ex: advertising, shipping, sales travel, sales commission, sales salaries and cost of finished goods.
Sunk cost
Cost that has already been incurred and that cannot be changed by any decision made now or in the future
Commond cost
Cost that is incurred to suport a number of cost object but cannot be traced to them individually. A type of indirect cost
Prime cost
Direct labor and direct material
Time ticket
Document used to record how long workers spend on each job and task
Manufacturing overhead
Factory cost such as cleaning supplies, taxes, insurance, and janitor wages
Committed fixed cost
Fixed cost that cannot be changed and often lock a company into a multi-year decision
Administrative cost
Includes all cost associated with the general management of an organization rather than with manufacturing or selling: ex: executive compensation, general accounting, secretarial, public relation and similar cost
Allocation base
Is a measure such as direct labor and services or machine-hour that is used to assign overhead costs to products
Cost object
Is anything of which cost data are desired- including products, customers, jobs, and organization subunits - for purpose of assiging cost to cost objects
Contribution margin
Is the amount remaining from sales revenue after variable expense have been deducted. This amount contributes towards covering fixed expenses and then toward profits for the period.
Relevant range
Is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid - within which the activity cost assumptions are reasonably valid
Overhead applications (allocation)
Process used to assign overhead cost to products
Inventoriable cost
Product cost that are initally assigned to inventory
Contribution approach
Provides managers with an income statement that clearly distinguishes between fixed and variable cost and therefore aids in planning, controlling and decision making
Cost behavior
Refer to how a cost reacts to change in the level of activity
Marginal revenue
Revenue that can be obtained from selling one more unit of product
Job-order costing
Used in situations where many different products, each with individual and unique features, are produced each period
Least-squares regression method
Uses all of the data to separate a mixed cost into its fixed and variable components
Within the relevent range of activity, variable cost:
Vary in total and remain constant per unit