Ch 2 Flashcards
Direct materials
Materials that become an integral part of the finished product
And whose costs can be traced to finished product
Raw materials
Any materials used in final product
Indirect materials
Relatively insignificant materials in finished products
Part of manufacturing overhead
Ex. Glue
Direct labor
Labor costs that can easily be traced to individual
Units of product
Indirect labor
Labor costs that can’t be physically traced to individual products
Treated as part of manufacturing overhead
Manufacturing overhead
Includes all manufacturing costs except direct materials
And direct labor
Selling costs, examples 6?
Include all costs incurred to secure customer orders
And get finished product to customer
Ex. Advertising, shipping, sales travel, sales commission,
Sales salaries, cost of finished goods warehouses
Administrative costs, examples 5?
Include all costs associated with general management
Of organization
Ex. Executive compensation, general accounting, secretarial,
Public relations, general administrative costs
Product costs AKA Inventoriable costs
Include all costs involved in acquiring or making product
Period costs
All selling and administrative expenses
Prime cost
Prime cost = direct materials cost + direct labor cost
Conversion cost
Conversion cost= direct labor cost +manufacturing overhead cost
Cost behavior
Refers to how cost reacts to changes in level of activity
Cost structure
Relative proportion of each type of cost in organization
Variable cost, examples 4? How is it expressed usually?
Varies, in total, in direct proportion to changes in activity level
Ex. Direct materials, direct labor, indirect materials, supplies
Expressed in per unit basis
Activity base AKA cost driver, examples 4? How is it usually expressed in text book?
Measure of whatever causes incurrence of variable cost
Ex. # miles driven, labor hours, machine hours, units produced
Usually expressed as total volume of goods and services
Provided by organization
Fixed cost
Cost that remains constant despite changes in activity levels
Committed fixed costs, 4 examples?
Represent organizational investments with multi year
Planning horizon, which can’t be reduced over short periods of
Time without making significant adjustments
Ex. Investments in facilities/equipment, real estate taxes, insurance expenses, salaries to top management
Discretionary fixed costs, 5 examples?
Arise from annual decisions by management to spend
On certain fixed cost items
Ex. Advertising, research, public relations,
management development programs, internships for students
Relevant range
Range of activity within which the assumption
That cost behavior is strictly linear is reasonably valid
Mixed costs AKA semi variable costs
Contains both variable and fixed cost elements
Account analysis of mixed costs
Account is classified as either variable or fixed
Based on analyst’s prior knowledge of how
Cost in account behaves
Engineering approach
Cost analysis involves detailed analysis of what cost
Behavior should be, based on industrial engineer’s
Evaluation of production methods, materials,
labor requirements, equipment usage, production efficiency,
Power consumption, etc
Dependent variable
Y axis, depends on another activity
Independent variable
Plotted on X axis, ex. Days, hours
Linear
Straight line
Variable cost
Variable cost = slope = change in cost/change in activity
High-low method
Variable cost = (cost high activity level - cost low activity level)/
(high activity level - low activity level)
Uses 2 dat points based on highest cost. And lowest cost
Least squares regression method
Y = mx + b
Uses all data points
Contribution approach
Provides managers with income statement that clearly distinguishes btw fixed and variable costs
Therefor aids in planning, controlling and decision making
Contribution margin
Amount remaining from sales revenues after variable
Expenses have been deducted
This amount contributes toward covering fixed expenses
Then toward profits for period
Cost object
Anything for which cost data are desired including
Products, customers, jobs, organizational subunits
Direct cost, example
Cost that can easily be traced to specified cost object
Indirect cost
Cost can’t be easily traced to specific cost object
Common cost
Cost incurred to support number of cost objects,
But can’t be traced to them individually
Differential cost AKA Incremental cost
Difference in costs between any 2 alternatives
Incremental only refers to increases in cost
Differential revenue
Difference in revenue btw any 2 alternatives
Opportunity cost
Potential benefit that is given up when one alternative
Is selected over another
Sunk cost
Cost has already been incurred and can’t be changed
By any decision made now or in the future
R-squared
Measures goodness of fit
Tells percentage of variation in dependent variable (cost)
That is explained by variation in independent variable (activity)
Quality of conformance
Degree to which a product or service meets or exceeds
It’s design specifications and is free of defects or other
Problems that mar its appearance or degrade performance
Quality cost
Refers to all costs that are incurred to prevent defects
Or result from defects in products
Prevention costs
Support activities whose purpose is to reduce number of defects
Quality circles
Small groups of employees that meet on regular basis
To discuss ways to improve quality
Statistical process control
Technique used to detect whether process is in or
Out of control
Workers use charts to monitor quality of units
Defects are out of control process in which machine
Produces defective units
Appraisal costs AKA Inspection costs
Are incurred to identify defective products before products
Are shipped to customers
Internal failure costs, examples 4?
Results from identifying defects before they are shipped to customers
Ex. Scrap, rejected products, reworking defective units,
Downtime caused by quality problems
External failure costs,4 examples?
Result when defective product delivered to customer
Ex. Warranty repairs, replacement, legal action,
Lost sales arising from reputation for poor quality
Quality cost report
Provides estimate of financial consequences of
Company’s current level of defects
Details prevention costs, appraisal costs, costs of internal
And external failures that arise from current quality control efforts
ISO 9000 standards
Quality control requirements issued by International
Organization for Standardization that relate to products sold in European countries
