Managerial Acct 202 McGraw Hill chp 1

High low method and least squares regression analysis estimate by

Analyzing past records of cost and activity data

conversion costs

Direct Labor + Manufacturing Overhead cost incurred to convert materials into the finished product

mixed costs

contains both variable and fixed cost elements. also known as semi-variable costs

direct labor + manufacturing overhead

conversion cost

cost behavior

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

because the variable cost per unit equals the slope of the straight line the steeper the slope,

the higher the variable cost per unit.

a mixed cost has a minimum cost of having a service available and ready for use.

this is the fixed portion of a mixed cost.

committed fixed costs include: top management salaries, public relations research real estate taxes

top management salaries real estate taxes

sunk cost

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

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.

administrative costs

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling. ex: executive compensation, general accounting, secretarial work, public relations

indirect costs

Costs that cannot be easily and accurately traced to a cost object. costs that are the result of a firm's general operations and are not directly tied to any specific cost object

prime cost

Direct Materials + Direct Labor

prime costs

Direct Materials + Direct Labor

most manufacturing companies further separate their manufacturing costs into two direct cost categories and one indirect cost category

Direct: direct materials, direct labor Indirect: manufacturing overhead.

if scatter graph plot reveals linear cost behavior then it makes sense to perform the

High low method or Least-squares regression analysis calculations to separate the mixed cost into its variable and fixed components. if it does not depict linear cost behavior, it makes no sense to proceed any further in analyzing the relationship between this independent variable and this dependent variable.

differential cost

The difference in cost between any two alternatives Can be fixed or variable

Dependant variable

The outcome factor; the variable that may change in response to manipulations of the independent variable. activity is the independent variable because it causes variations in the cause.

direct cost

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

fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity examples: straight line depreciation, insurance, rent and administrative salaries.

differential cost

a difference in cost between two alternatives

activity base

a measure of whatever causes the incurrence of a variable cost also known as cost driver

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 levels one way to estimate the costs formula for a mixed cost. based on rise over run formula for the slope of a straight line.

Period costs

all costs that are not product costs Ex: sales commissions, advertising, executive salaries, public relations, rental costs of administrative offices. are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting

y = a + bX

an equation that can be used to explain the relationship between an mixed cost and a level of activity. a = total fixed cost b = variable cost per unit of activity X = number of activities (level of activity) y = mixed cost

cost object

anything for which cost data are desired Product, process, department, or customer to which costs are assigned.

Common costs pertain to costs that:

are not directly traceable to a cost object

managers use cost ______________ to predict how costs will change as the level of activity changes

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

Mixed Costs

costs that have both a fixed and a variable component

variable costs vary _____________ within the relevant range of activity per unit in total

in total costs that vary per unit are fixed cost

common cost

is a cost that is incurred to support a number of cost objects but cannot be traced to them individually

direct materials

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

committed fixed costs

organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes

cost expensed on the income statement when incurred are _____________ and ____________ costs become part of the inventory on the balance sheet

period, product

costs are assigned to cost objects for a variety of purposes including:

pricing, preparing profitability studies, and controlling spending.

Non-manufacturing costs

selling costs and administrative costs also termed as selling costs, general costs and administrative costs

marginal cost

the cost of producing one more unit of a good

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 each type of cost in an organization

cost structure

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

least-squares regression method

uses all of the data to separate a mixed cost into its fixed and variable components generally more accurate then High low method

discretionary fixed costs

usually arise from annual decisions by management to spend on certain fixed cost items can be cut for short periods of time with minimal damage to the log run goals of the organization

High-Low Method calculation

variable cost = Y2-Y1/X2-X1 = cost at the high act level - cost at the low level act level/ high act level - low activity level (change of activity between those two points ) vairiable costs = change in cost/change in activity fixed cost element = total cost - variable cost element

variable cost

varies in total, in direct proportion to changes in the level of activity. examples: direct materials, direct labor, supplies. power, sales commissions, shipping costs.

opportunity cost

when one alternative is selected over another the most desirable alternative given up as the result of a decision