Accounting # 4

Activity- Based costing (ABC)

A cost allocation method that identifies activities causing the incurrence of cost and allocates these costs to products, based on activity drivers (bases).

Sunk cost

A cost is not affected by subsequent decisions.

Theory of constraints

A manufacturing strategy that attempts to remove the influence of bottlenecks (constraints) on a process.

Average rate of return

A method of evaluating capital investment proposals that focuses on the expected profitability of the investment.

Production Bottleneck

A condition that occurs when product demand exceeds production capacity.

Opportunity Cost

The amount of income forgone from an alternative to a proposed use of cash or its equivalent.

Differential Cost

The amount of increase or decrease in cost expected from a particular course of action compared with an alternative

Differential Revenue

The amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative.

Net differential income (loss)

The difference between the differential revenue and the differential costs.

Capital rationing

The process by which management plans, evaluates, and controls long term capital investments involving fixed assets.

Capital investment analysis

The process by which management plans, evaluates, and controls long term capital investments involving property, plant, and equipment.

Target costing

The target cost is determined by subtracting a desired profit from a market method determined price. the resulting target cost is used to motivate cost improvements in design and manufacture.