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