Managerial Accounting Chapter 2

differential cost

A difference in costs between any two alternatives is known as a ______ .

differential revenue

A difference in revenues between any two alternatives is known as ________

A sunk cost

A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Indirect Labor

Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience (night security guards / janitors) Manufacturing overhead.

cost structure

The relative proportion of each type of cost in an organization

raw materials

This term is somewhat misleading because it seems to imply unprocessed natural resources like wood pulp or iron ore. Actually, raw materials refer to any materials that are used in the final product; and the finished product of one company can become the raw materials of another company. For example, the plastics produced by Du Pont are a raw material used by Hewlett-Packard in its personal computers.

Nonmanufacturing costs are often divided into two categories:

(1) selling costs and (2) administrative costs.

Direct labor

consists of labor costs that can be easily (i.e., physi- cally and conveniently) traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made. (ie assembly line workers)

A mixed cost

contains both variable and fixed cost elements. Mixed costs are also known as semivariable costs

Administrative costs

include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole.

product costs

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

Selling costs

include all costs that are incurred to secure cus- tomer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs. Examples of selling costs include advertis- ing, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses

A direct cost

is a cost that can be easily and conveniently traced to a specified cost object. The concept of direct cost extends beyond just direct materials and direct labor.

An indirect cost

is a cost that cannot be easily and conveniently traced to a specified cost object. For example, a Campbell Soup factory may produce dozens of varieties of canned soups. The factory manager's salary would be an indirect cost of a particular variety such as chicken noodle soup.

A common cost

is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost is a type of indirect cost.

fixed cost

is a cost that remains constant, in total, regardless of changes in the level of activity. Examples of fixed costs include straight-line depreciation, insurance, prop- erty taxes, rent, supervisory salaries, administrative salaries, and advertising.

A cost object

is anything for which cost data are desired—including products, customers, jobs, and organizational subunits.

The contribution margin

is the amount remaining from sales revenues after variable expenses have been deducted. This amount contributes toward covering fixed expenses and then toward profits for the period.

Opportunity cost

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

The relevant range

is the range of activ-ity within which the assumption that cost behavior is strictly linear is reasonably valid. Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable.

Conversion cost

is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.

Prime cost

is the sum of direct materials cost and direct labor cost.

Committed fixed costs

represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Examples include investments in facilities and equipment, as well as real estate taxes, insurance expenses, and salaries of top management.

Indirect Materials

solder and glue are called indirect materials and are included as part of manu-facturing overhead,

Manufacturing overhead

the third element of manufacturing cost, includes all manufacturing costs except direct materials and direct labor. Manufacturing overhead includes items such as indirect materials; indirect labor; main- tenance and repairs on production equipment; and heat and light, property taxes, depre- ciation, and insurance on manufacturing facilities.

The engineering approach

to cost analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation of the production methods to be used, the materials specifications, labor requirements, equipment usage, production effi- ciency, power consumption, and so on.

The least-squares regression method

unlike the high-low method, uses all of the data to separate a mixed cost into its fixed and variable components.

Discretionary fixed costs (often referred to as managed fixed costs )

usually arise from annual decisions by management to spend on certain fixed cost items. Examples of discretionary fixed costs include advertising, research, public relations, manage- ment development programs, and internships for students. Discretionary fixed costs can be cut for short periods of time with minimal damage to the long-run goals of the organization.

In 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.

Period costs

are all the costs that are not product costs. All selling and administrative expenses are treated as period costs. For example, sales commissions, advertising, exec- utive salaries, public relations, and the rental costs of administrative offices are all period costs

Direct materials

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

A variable cost

varies, in total, in direct proportion to changes in the level of activity. Common examples of variable costs include cost of goods sold for a merchandising com- pany, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administra- tive expenses, such as commissions and shipping costs.