Chapter 2

Question 1

A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account
behaves.

Answer 1

Account analysis

Question 2

A measure of whatever causes the incurrence of a variable cost. For example, the total cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X-rays is the activity base that explains the total cost of X-ray film.

Answer 2

Activity base

Question 3

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

Answer 3

Administrative costs

Question 4

Investments in facilities, equipment, and basic organizational structure that can’t be significantly reduced even for short periods of time without making fundamental changes.

Answer 4

Committed fixed costs

Question 5

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.

Answer 5

Common cost

Question 6

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.

Answer 6

Contribution approach

Question 7

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

Answer 7

Contribution margin

Question 8

Direct labor cost plus manufacturing overhead cost.

Answer 8

Conversion cost

Question 9

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

Answer 9

Cost behavior

Question 10

Anything for which cost data are desired. Examples of cost objects are products, customers, jobs, and parts of the organization such as departments or divisions.

Answer 10

Cost object

Question 11

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

Answer 11

Cost structure

Question 12

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.

Answer 12

Dependent variable

Question 13

A difference in cost between two alternatives. Also see Incremental cost.

Answer 13

Differential cost

Question 14

The difference in revenue between two alternatives.

Answer 14

Differential revenue

Question 15

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

Answer 15

Direct cost

Question 16

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

Answer 16

Direct labor

Question 17

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

Answer 17

Direct materials

Question 18

Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.

Answer 18

Discretionary fixed costs

Question 19

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.

Answer 19

Engineering approach

Question 20

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

Answer 20

Fixed cost

Question 21

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.

Answer 21

High-low method

Question 22

An increase in cost between two alternatives. Also see Differential cost.

Answer 22

Incremental cost

Question 23

A variable that acts as a causal factor; activity is the independent variable, as represented by the letter X, in the equation Y = a + bX.

Answer 23

Independent variable

Question 24

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

Answer 24

Indirect cost

Question 25

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

Answer 25

Indirect labor

Question 26

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.

Answer 26

Indirect materials

Question 27

Synonym for product costs.

Answer 27

Inventoriable costs

Question 28

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.

Answer 28

Least-squares regression method

Question 29

Cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity.

Answer 29

Linear cost behavior

Question 30

All manufacturing costs except direct materials and direct labor.

Answer 30

Manufacturing overhead

Question 31

A cost that contains both variable and fixed cost elements.

Answer 31

Mixed cost

Question 32

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

Answer 32

Opportunity cost

Question 33

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

Answer 33

Period costs

Question 34

Direct materials cost plus direct labor cost.

Answer 34

Prime cost

Question 35

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.

Answer 35

Product costs

Question 36

Any materials that go into the final product.

Answer 36

Raw materials

Question 37

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

Answer 37

Relevant range

Question 38

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

Answer 38

Selling costs

Question 39

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

Answer 39

Sunk cost

Question 40

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

Answer 40

Variable cost