Managerial Accounting Chapter 2

Indirect Cost

A cost that CANNOT be easily and conveniently traced to a specified cost object. (p. 29) Example: manufacturing overhead.

Direct cost

A cost that can be easily and conveniently traced to a specified cost object. (p. 28)Examples: direct material and direct labor)

Mixed cost

A cost that contains both variable and fixed cost elements. (p. 37)

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future. (p. 46)

Common cost

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any one passenger taking the flight. (p. 29)

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. (p. 34)

Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity. It is constant per unit. (p. 33)

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. (p. 39)

Differential cost

A difference in cost between two alternatives. Also see Incremental Cost (p. 46)

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 level. (p. 40)

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. (p. 42)

activity, cost of goods sold, direct materials, direct labor, selling, administrative expenses, commissions, shipping costs

A variable cost varies, in total, in direct proportion to changes in the level of a__________________. Common examples of variable costs include c________ o___ g__________ s________________ for a merchandising company, d_____________ m______________, d____________ l______________, variable elements of s_______________ and a________________ expenses, such as c__________________ and s________________ c____________.

Independent variable

A variable that acts as a casual factor; activity is the i__________________ v_____________, as represented by the letter X, in the equation Y=a + bX. (p. 40)

Dependent variable

A variable that responds to some casual factor; total cost is the d______________ v___________, as represented by the letter Y, in the Y = a + bX. (p. 39)

Selling costs

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer. (p. 30). These costs are associated with order-getting and order-filling. (advertising, shipping, sales travel, sales commissions, sales salaries, cost of finished goods warehouses) Selling costs can be direct or indirect.

Product costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Also see Inventoriable costs. (p. 31)

Administrative Costs

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling. (p.30)

Manufacturing overhead

All manufacturing costs except direct materials and direct labor. (p. 30) It includes indirect materials and indirect labor such as maintenance and repairs on production equipment, heat and light, property taxes, depreciation, and insurance on manufacturing facilities.. HOWEVER, the costs for heat, light, property taxes, insurance, depreciation, etc. associated with its selling and administrative functions are NOT included as part of manufacturing overhead. Only the costs associated with operating the factory are included.

cost driver

An activity base (a measure of whatever causes the incurrence of a variable cost) is also known as what?

direct labor hours, machine-hours, produce, sold, number, volume of goods, services

An activity base (cost driver) most commonly includes: d_________ l_______ h________, m____________ h________, units p____________, and units s__________, or the n___________ of something produced or completed. While there are many activity bases within organizations, you should assume the activity base under consideration is the total v___________ o__ g________ and s_________________ provided by the organization, or total output.

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. (p. 45)

Incremental cost

An increase in cost between two alternatives. Also see Differential Cost. (p. 46)

Raw Materials

Any materials that go into the final product. (p. 29)

Cost object

Anything for which cost data are desired. Examples of c_______ o_____________ are products, customers, jobs, and parts of the organizations such as departments or divisions. (p. 28)

direct labor, manufacturing overhead

Conversion cost is the sum of d___________ l____________ and m________________ o___________________ because these costs are incurred to convert materials into finished goods.

variable costs, fixed costs, mixed costs

Cost Classifications for Predicting Cost Behavior: Cost behavior refers to how a cost will react to changes in the level of activity. The most common classifications are:

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. (p. 40)

product, period, conversion, prime

Costs and expenses such as direct materials, direct labor, manufacturing overhead, selling expenses, and administrative expenses can be categorized in a number of ways, including p________ costs, p________d costs, c_____________ costs, and p____________ costs.

Period costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. (p. 31) All costs that are NOT product costs are period costs and are reported on the income statement as expenses. Sales commissions, advertising, executive salaries, public relations, rental costs of administrative offices...

Conversion cost

Direct Labor cost plus manufacturing overhead costs. (p. 32)

Prime cost

Direct materials cost plus direct labor cost. (p. 32)

managed fixed costs

Discretionary fixed costs are also known as what?

Direct labor (touch labor)

Factory labor costs that can be easily traced to individual units of product. Also called touch labor. (p. 29)

activity level

In Y = a + bX, the X represents what?

Total fixed cost (The vertical intercept of the line)

In linear form, "a" represents what? Y = a + bX

mixed costs

In linear form, Y represents what? Y = a + bX

balance sheet, income statement, income statement

Inventory is reported on what financial form? The cost of goods sold is reported on what financial form? Expenses are reported on what financial form?

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. (p.35) Examples Depreciation on Buildings and Equipment and Real Estate Taxes

direct materials, direct labor

Manufacturing overhead is all manufacturing costs except d___________ m_____________ and d___________ l___________. (p. 30)

Direct Materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it. (p. 29)

indirect material

Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

selling, general, administrative

Nonmanufacturing costs are also often called s_____________, g____________ an a_______________ costs.

direct materials, direct labor

Prime cost consists of the sum of d____________ m___________ cost and d______________ l__________ cost.

Contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted. (p. 45)

varies inversely

The average fixed cost PER UNIT v____________ i______________ with the changes in activity. (Slide 22)

step-variable costs

The cost behavior patterns such as salaried employees are often called s_______-v_______________ c__________.

Indirect Labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to it. (p. 29) Examples: maintenance workers, janitors, and security guards.

Opportunity cost

The potential benefit that is given up when one alternative is selected over another. (p. 46)

Relevant range

The range in activity within which assumptions about variable and fixed cost behavior are valid. (p. 36)

Cost structure

The relative proportion of fixed, variable, and mixed costs in an organization. (p. 33)

Cost behavior

The way in which a cost reacts to changes in the level of activity. (p. 33)

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. (p. 35) Examples Advertising and Research and Development

constant

Variable cost per unit is ________. (See Slide 18 & 19 I think variable costs are affected by the level of activity)

semivariable costs

mixed costs are also known as what?

Inventoriable costs

synonym for product costs. (p. 31)

Differential revenue

the difference in revenue between two alternatives (p. 46)