Managerial Accounting & Cost Concepts Ch. 1

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 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 that cannot be traced to them individually.

fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If it 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. It 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.

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 analyst's 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 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 casual factor

dependent variable

a variable that responds to some casual factor; Y=a+bX

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

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, material 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 cost behavior are valid

cost structure

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

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.

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.

administrative costs

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

contribution approach

an income statement format that organizes costs by their 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 two alternatives.

raw materials

any materials that go into the final product

cost object

anything for which cost data are desired.

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

period costs

costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued

conversion cost

direct labor cost plus manufacturing overhead cost

prime cost

direct materials cost plus direct labor cost

direct labor

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

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

direct materials

materials that become an integral part of a finished product and whose costs can be conveniently traced to it