Accounting 2203, Chapter 1

Scatter plot

Dependent variable=cost (Y) Independent variable= activity (X)

Cost of goods sold

(Beginning merchandise inventory) + (purchases) + (ending merchandise inventory)

direct cost

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

indirect cost

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

Common cost

A cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost is a type of indirect cost.

Differential Cost

A difference in costs between any two alternatives. Also known as an incremental cost.

Differential Revenue

A difference in revenue between any two alternatives.

High-low method

A method of separating a mixed cost into its fixed cost and variable elements by analyzing the change in cost between the high and low activity levels. The slope of the line equal variable cost per unit of activity.

Period costs

All the cost that are not product cost. All selling and administrative expenses are treated as period cost. Reported on the income statement. Advertising and Sales commission are period cost. PERIOD COST= SELLING EXPENSES + ADMINISTRATIVE EXPENSES

Sunk Cost

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

Engineering Approach

Cost analysis involves a detailed analysis of what cost behavior, should be based on an industrial engineer's evaluation of the production methods to be used, the materials specifications, labor requirements, equipment usage, production efficiency, power consumption, etc.

Fixed Cost Element

Fixed cost element= Total cost - Variable cost element

Account Analysis

In an account analysis an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves.

Administrative cost

Include all costs associated with general management of an organization rather than with manufacturing or selling.

Selling costs

Include all costs that are incurred to secure customer orders and get finished product to the customer .These cost are sometimes called order-getting or order-filling costs.

Fixed cost

Is a cost that remains constant, in total, regardless of changes in the level of activity. Fixed cost per unit decreases as the activity level rises and increases as the activity level falls. Examples straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries and advertising. Becomes progressively smaller as the level of activity increases.

Indirect materials

Not included as part of manufacturing overhead

Committed fixed cost

Represents organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Examples include investments in facilities and equipment, real estate taxes, insurance expenses and salaries of top management.

Opportunity cost

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

Relevant Range

The range of activity within which the assumption that cost behavior is strictly linear to reasonable valid.

Cost structure

The relative proportion of each type of cost in an organization.

Discretionary fixed costs

Usually arise from annually decisions by management to spend on certain fixed cost items. Examples of discretionary cost advertising, research, public relations, management development programs and internship for students.

Variable cost

Variable cost= (Y2-Y1)Change in Cost ------------------------- (X2-X1) change in activity

Variable cost

Varies, in total, in direct proportion to changes in the level of activity. Variable cost per unit remains constant.Examples of variable costs includes cost of goods sold for merchandising company, direct materials, direct labor, variable elements of selling and administrative expenses, such as commissions and shipping costs.

Y=a + bX

Y= the total mixed cost a= the total fixed cost b= the variable cost per unit of activity X= the level of activity

Least-squares regression method

uses all of the data to separate a mixed cost into its fixed cost and variable components. The vertical line represents total fixed cost.

Raw materials

Any material that is used in a final product.

Mixed cost

Contains both variable and fixed cost elements. Mixed cost are also known as semivariable costs.

Product cost

Includes all costs involved in acquiring or making a product. Product cost are initially assigned to an inventory account on the balance sheet.When the goods are sold, the costs are released from inventory from inventory as expenses and matched against sales revenue on the income statement. Also known as inventoriable costs. PRODUCT COST=DIRECT MATERIALS + DIRECT LABOR + MANUFACTURING OVERHEAD

Activity base

Is a measure of whatever causes the incurrence of a variable cost. An activity base is sometimes referred to as a cost driver. Example direct-labor hours, machine hours, units produced and units sold.

Conversion Cost

Is the sum of direct labor cost and manufacturing overhead cost. CONVERSION COST= DIRECT LABOR + MANUFACTURING OVERHEAD

Direct labor

Labor costs that can be easily traced to individual units of product.

Indirect labor

Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience. A part of manufacturing overhead.

Contribution Margin

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

Prime Cost

The sum of direct materials cost and direct labor cost. PRIME COST= DIRECT MATERIALS + DIRECT LABOR

Manufactring overhead

The third manufacturing cost category, includes all manufacturing costs except direct materials, indirect labor and direct labor. Manufacturing overhead has various names such as manufacturing cost, factory overhead, and factory burden.

Direct materials

Those materials that become an integral part of finished and whose costs can be conveniently traced to the finished product.

Matching principal

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.

Contribution Approach

Provide managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision making.

Cost Behavior

Refers to how a cost reacts to changes in the level of activity.