Chapter 2 Flashcards
Opportunity Cost
the lost opportunity/benefit from choosing to do something else
Direct Cost
cost that can be traced directly to a specific product i.e. assembly worker
Indirect Cost
costs that can’t easily be traced to a specific product i.e. assembly line supervisor
Variable Cost
costs change in total in direct proportion to changes in activity levels
i.e. need more pizza sauce if make more pizzas
Fixed Cost
costs stay the same in total regardless of activity (w/in a range of activity)
i.e. cost of factory & equipment same if make 10 or 1000 pizzas.
Differential Cost
costs that differ across alternatives
Sunk Costs
costs that have already been incurred in the past - will NOT impact future decisions
Product Costs
manufacturing costs, “inventoriable” traced through inventories, expensed when product sold
Direct Materials
major inputs, can be physically/conveniently traced to final product i.e. pizza sauce
Direct Labor
can be physically & conveniently traced to the product i.e. assembly workers
Manufacturing Overhead
all other manufacturing costs
Indirect materials
minor materials, can’t be conveniently traced to individual units i.e. seasoning
Indirect Labor
don’t touch product but ARE involved in manufacturing process i.e. supervisors
Prime Costs
primary costs that can be traced to end product = Direct Materials & Direct Labor
Conversion Costs
convert direct materials to finished product=Direct Labor + Manufacturing Overhead
Period Costs
expensed in period incurred
Non- manufacturing Costs
costs to run business & sell product
Marketing and Selling Costs
delivery, sales managers, advertising
Administrative Costs
running organization i.e. rent for headquarters, accounting, top management
Relevant Change
range of activity over which we expect our assumptions about cost behavior to hold true.
Variable Costs
change in total in direct proportion to changes in activity levels, remains constant per unit
Fixed Costs
remains constant in total but vary inversely to changes in activity levels (activity increases, cost per unit decreases)
Step Costs
fixed over some range of activity and then increase in a step-like fashion when a capacity limit is reached.
Step Variable Costs
Nearly variable costs that increase in small steps instead of continuously
i.e. add additional shifts to handle small increases in output -
0-100 donuts requires 1 shift, 100-200 2 shifts, 200-300 3 shifts
Step Fixed Costs
Fixed over a wide range of activity but jump to a different amount (wider steps) for activity levels outside the range i.e. hire another salary manager or full time (40 hour) employee, open another plant
Mixed or Semi Variable Costs
Has both fixed & variable components i.e. delivery truck rent (FC) + fuel (VC)
Curvilinear
Exhibits both decreasing & increasing marginal costs over a specific range of activity. i.e. utility costs that have decreasing marginal costs per unit at low level but increasing marginal costs at higher level since using equipment that is less energy efficient.
Linear equation for Mixed Costs
Y = A + BX Total Cost (Y) = Total Fixed Cost (A) + Total Variable Cost (BX) Total Cost (Y) = Total Fixed Cost (A) + (VC/unit x # units)
High-Low method
Variable Cost per unit or VC/unit = cost at highest activity – cost at lowest activity
units at highest activity – units at lowest activity
Contribution Margin
Amount of sales available to cover FC & profit (after VC) = Sales - VC
