Chapter 1 Managerial Accounting

statistical process control

a charting technique used to monitor the quality of work being done in a workstation for the purpose of immediately correcting any problems.

indirect cost

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

common cost

a cost that is incurred to support a number of cost objects but cannot be traced to them individually. it's a type of indirect cost.

Internal failure costs

esult from identifying defects before they are shipped to customers. These costs include scrap, rejected products, reworking of defective units, and downtime caused by quality problems.

when quality of conformance is low

most of the quality cost is internal and external failure cost

committed fixed costs

represent organizational investments with a multiyear planning horizon that cannot be significantly reduced even for short periods of time without making fundamental changes. e.g: investments in facilities and equipment, real estate taxes, insurance premiums, and salaries of top management.

sunk cost

a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Because it cannot be changed by any decision, they are not differential costs. And because only differential costs are relevant in a decision, xxxx costs should always be ignored.

fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity.

differential cost (incremental cost)

a future cost that differs between any two alternatives. It's always relevant costs. This concept can be compared to the economist's marginal cost concept.

administrative costs

all costs associated with the general management of an organization rather than with manufacturing or selling. e.g: executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole. It can be either direct or indirect.

selling costs

all costs that are incurred to secure customer orders and get the finished product to the customer. e.g: advertising, shipping,sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. it can be either direct of indirect.

scrapped units

an example of spoilage and it not considered to be a common activity base or a cost driver

contribution approach

an income statement format that organizes costs by their behavior. costs are separated into variable and fixed categories rather than being separated in to product and period costs for external reporting purposes.

Raw materials

any materials that are used in the final product; and the finished product of one company can become the raw materials of another company.

period costs

are all costs that are not product costs. all selling and administrative expenses are treated as period costs. the are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting.

matching principle

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.

finished goods

consist of completed units of product that have not yet been sold to customers.

direct labor

consists of labor costs that can be easily traced to individual units of product. It's sometimes called 'touch labor' because direct labor workers typically touch the product while it it being made.

work in process

consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer.

mixed costs (semivariable costs)

contains both variable and fixed cost elements

prevention costs

costs that are incurred to keep defects form occurring

quality cost

costs that are incurred to prevent defective products from falling into the hands of customers or that are incurred as a result of defective units. it can be broken down into four broad groups. prevention costs and appraisal cost -- are incurred in an effort to keep defective products form falling into the hands of customers. internal failure costs and external failure costs -- are incurred because defects occur despite efforts to prevent them.

differential revenue

future revenue that differs between any two alternatives. it is an example of a relevant benefit.

variable cost

in total, indirect proportion to changes inthe level of activity. e.g: cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs.

product costs

include all costs involved in acquiring or making a product. They "attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale. When units of product are sold, their costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales on the income statement. Also known as 'inventoriable costs'

Direct cost

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

activity base

is a measure of whatever causes the incurrence of a variable cost. Also referred to as a cost driver. e.g: the total cost of surgical gloves in a hospital will increase as the number of surgeries increases. therefore, the number of surgeries is the activity base that explains the total cost of surgical gloves.

A cost object

is anything for which cost data are desired--- including products, customers, and organizational subunits. Either direct or indirect.

Managerial accounting

is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions.

particular cost

may be direct or indirect, depending on the cost object. While the Campbell Soup factory manager's salary is an indirect cost of manufacturing chicken noodle soup. it is a direct cost of the manufacturing division. in the first case, the cost object is chicken noodle soup. in the second case the cost object is the entire manufacturing division.

step-variable costs

may include total salaried employee expense. they can be adjusted quickly as conditions change.furthermore, the width of the steps for step-variable costs is generally so narrow that these costs can be treated essentially as variable costs for most purpose.

ISO 9000 standards

quality control requirements issued by the international organization for standardization that relate to products dold in European countries.

direct materials

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

cost behavior

refers to how a cost reacts to changes in the level of activity

external failure costs

result when a defective product is delivered to a customer. e.g: warranty repairs and replacements, product recalls, liability arising from legal action against a company, and lost sales arising from a reputation for poor quality. Such costs can decimate profits.

quality circles

small groups of employees that meet on a regular basis to discuss ways of improving quality

contribution margin

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

quality of conformance

the degree to which a product or service meets or exceeds its design specifications and is free of defects or other problems that mar its appearance or degrade its performance

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 is reasonably valid.

cost structure

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

conversion cost

the sum of direct labor and manufacturing overhead

prime cost

the sum of direct material cost and direct labor cost

maufacturing overhead

the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor. e.g: depreciation of equipment, utility cost, property taxes, and insurance premiums incurred to operate a manufacturing facility. (only those indirect costs associated with operating the factory)

a manufacturer's product costs flow

through three inventory accounts on the balance sheet -- raw materials, work in process, and finished goods -- prior to being recorded in cost of goods sold on the income statement.

discretionary fixed costs (managed fixed costs)

usually arise from annual decisions by management to spend on certain fixed cost items. e.g: advertising, research, public relations, management development programs, and internships for students. it can be cut for shot periods of time with minimal damage to the long-run goals of the organization.

appraisal costs

which are sometimes called inspection costs, are incurred to identify defective products before the products are shipped to customers.