Managerial Accounting Chapter 2

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From Garrison Noreen Brewer book 14th edition

ACCOUNT ANALYSIS

METHOD FOR ANALYZING COS BEHAVIOR IN WHICH AN ACCOUNT IS CLASSIFIED AS EITHER VARIABLE OR FIXED BASED ON THE ANALYSTS PRIOR KNOWLEDGE OF HOW THE COST IN THE ACCOUNT BEHAVES.

Activity Base

A measure of whatever causes the incurrence of a variable cost.

Administrative Costs

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

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.

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.

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.

Contribution margin

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

Conversion Cost

Direct labor cost plus manufacturing overhead cost.

Cost Behavior

The way in which a cost reacts to changes in the level of activity.

Cost Object

Anything for which cost data are desired. Ex. products, customers, jobs, and parts of org such as departments or divisions.

Cost Structure

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

Dependent Variable

A Variable that responds to some causal factor: total cost is the dependent variable, as represented by the letter Y, in the equation Y=a+bx

Differential cost

A difference in cost between two alternatives.

Differential Revenue

The difference in revenue between two alternatives.

Direct Cost

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

Direct labor

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

Direct materials

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

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.

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.

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a died cost is expressed on a per unit basis, it varies inversely with the level of activity.

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.

Incremental cost

An increase in cost between two alternatives.

Independent variable

A variable that acts as a causal factor: activity is the independent variable, as represented y the letter X, in the equation Y=a+bx

Indirect cost

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

Indirect Labor

The labor costs of janitors supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

Indirect Materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Inventoriable costs

synonym for product costs.

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.

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.

Manufacturing overhead

All manufacturing costs except direct materials and direct labor

Mixed Cost

A Cost that contains both variable and fixed cost elements.

Opportunity cost

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

Period costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued.

Prime cost

Direct materials cost plus direct labor costs.

Product costs

All costs that are involved in acquiring or making a product. Inc the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.

Raw materials

Any materials that go into the final product.

Relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Selling costs

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer.

Sunk cost.

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

Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity. a Variable cost is constant per unit.

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