Chapter 1 Managerial Accounting

Direct Cost

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

Difference Revenue

A difference in revenues between any two alternatives.

Opportunity Cost

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

Indirect Cost

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

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of activity. Examples: Straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising.

Activity Base

A measure of whatever causes the incurrence of a variable cost. This is sometimes is called a cost driver. Example: Direct labor-hours, machine-hours, units produced, and units sold.

Period Costs

All the costs that are not product costs. All selling and administrative expenses are treated as period costs. Example: Sales commissions, Advertising, Executive Salaries, Public relations, and the rental costs of administrative offices.

Committed Fixed Costs

Represents organizational investments with a multi year planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes.

Contribution Margin

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

Manufacturing Overhead

The third element of manufacturing cost, includes all manufacturing costs except direct materials and direct labor. Includes items such as indirect labor; indirect materials; maintenance and repairs of production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities. Only those costs associated with operating the factory are included in. Various names are indirect manufacturing cost, factory overhead, and factory burden.

High Low Method

Variable Cost = Change in cost/Change in activity

Differential Cost

A difference in costs between any two alternatives. Also known as Incremental Cost.

Independent Variable

Activity is known as this and it is used as the X-Variable.

Administrative Costs

Includes all costs associated with the general management of an organization rather than with manufacturing or selling. Examples: Executive compensation, General accounting, Secretarial, Public relations

Direct Labor

Labor costs that can be easily traced to individual units of product. Sometimes called touch labor.

Indirect Materials

Materials such as solder and glue. This is included as part of manufacturing overhead.

Direct Materials

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

Raw Materials

Materials that go into the final product

Contribution Approach

Provides managers with an income statement that clearly distinguishes between fixed and variable costs.

Discretionary Fixed Costs

Referred to as managed fixed costs. usually arise from annual decisions by management to spend on certain fixed cost items. Examples: Advertising, Public Relations, Management development programs, and internships for students.

Least Squares Regression Method

Y= a + bX

Mixed Costs

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

Dependent Variable

Cost is known as this and it is used as the Y-Variable

Cost Behavior

How a cost reacts to changes in the level of activity. As the activity level rises and falls, a particular cost may rise and fall as well - or it may remain constant. This is considered linear whenever a straight line is b g

Product Costs

Include all costs involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct labor, direct materials, and manufacturing overhead. Also known as inventoriable costs.

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.

Traditional Format Income Sheet

Cost of goods sold = Beginning merchandise inventory + Purchases - Ending merchandise inventory

Selling Costs

Include all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs. Examples: Advertising, Shipping, Sales Travel, Sales Commission, Sales Salaries, and costs of finished goods warehouses.

Indirect Labor

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

Relevant Range

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

Cost Structure

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

Conversion Cost

The sum of direct labor cost and manufacturing overhead cost.

Prime Cost

The sum of direct materials cost and direct labor cost.

Variable Cost

Varies, in total, in direct proportion to changes in the level of activity. Examples: Cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead