Key terms

Question 1

Benefit cost analysis:

Answer 1

measures the effects of a plan by comparing its expected benefits and costs, which can be quantitative and qualitative.

Question 2

Competitive advantage

Answer 2

is expressed in euros, dollars or another currency (financial information) or in other quantities relating to size, frequency, and so on (non-financial information).

Question 3

Cost management:

Answer 3

measures whether the performance of current operations is consistent with expectations.

Question 4

Qualitative information

Answer 4

is descriptive, expressed in words instead of numbers, and based on characteristics or perceptions, such as relative desirability, rather than quantities.

Question 5

Quantitative information:

Answer 5

is expressed in euros, dollars or another currency (financial information) or in other quantities relating to size, frequency, and so on (non-financial information).

Question 6

Accrual cost:

Answer 6

1 – a measure of the value of resources used, when reporting results of operations or estimating long-run costs. 2 – a short cut for the complete cost implications of the opportunity cost of picking up or delivering fabric is the accounting or accrual cost, which is an average cost.

Question 7

Administrative costs:

Answer 7

costs incurred to manage the organization and provide staff support, including executive and clerical salaries; costs for legal, computing and accounting services; and building space for administrative personnel.

Question 8

Cash or out-of-pocket cost

Answer 8

1 – the incremental money price paid, when deciding whether it is worthwhile to buy incremental resources needed now. 2 – the incremental cost paid by cash or credit to achieve a particular purpose.

Question 9

Committed costs:

Answer 9

costs incurred because of policies or contractual obligations.

Question 10

Conversion cost:

Answer 10

when all of labor cost is a small part of total manufacturing costs, some companies include labor with overhead and term the total indirect cost they call them conversion costs.

Question 11

Cost:

Answer 11

sacrifice made, measured by the value of the resources given up, to achieve a particular purpose.

Question 12

Cost of sales:

Answer 12

the costs of products sold in the period of sales

Question 13

Direct cost:

Answer 13

the costs of resources that are physically observed being used to create specific products.

Question 14

Fixed cost:

Answer 14

expenses that are not dependent on the level of goods or services produced by the
business.

Question 15

Indirect cost

Answer 15

costs that cannot be feasibly traced to object, such as products.

Question 16

Indirect labor cost:

Answer 16

the wages of production employees who do not work directly on the product yet are required for the manufacturing facility’s operation. These employees include supervisors, maintenance workers, purchasing managers and material-handling employees.

Question 17

Indirect material cost:

Answer 17

all materials that either (1) are not a part of the finished product but are necessary to manufacture it or (2) are part of the finished product but are insignificant in cost.

Question 18

Manufacturing overhead cost

Answer 18

an indirect cost that includes resources necessary for the manufacturing process, but which cannot be easily traced to specific units of product. Manufacturing over- head includes indirect material, indirect labor and other manufacturing costs that are shared resources for multiple products or cannot be traced.

Question 19

Sunk cost:

Answer 19

a cost that has already been incurred and cannot be recovered. Sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken.

Question 20

Period cost

Answer 20

1 – for external reporting purposes, any cost that is not a product cost. 2 – non-
manufacturing costs that are expressed in the period incurred for external reporting purposes.

Question 21

Product cost:

Answer 21

a cost assigned to goods that were either purchased or manufactured for resale. Product cost is the historical cost of the inventory of manufactured or purchased goods until the goods are sold.

Question 22

Account analysis:

Answer 22

Cost estimates are based on a review of each activity account making up the total cost being analyzed. The account analysis method follows three steps:

1. Identify the objects for which costs need to be estimated.
2. Gather cost and cost-driver amounts for each cost account for each time period.
3. Compute the average cost-driver rate for each cost account.

Question 23

Engineering estimate:

Answer 23

Analysts make engineering estimates of costs, first by measuring the work involved in the activities that go into a product and then by assigning a cost to each of those activities

Question 24

High – low method:

Answer 24

estimates a cost function using only the costs at the highest and lowest level of workload and output. The high-low method is a simple ‘back of the envelope’ way to get estimates of the slope and intercept of a straight line using just two points of data. The high-low method has generally been replaced by the use of spread- sheets and regression analysis.

Question 25

Linear regression analysis or regression analysis:

Answer 25

is a statistical method used to create a equation relating independent (or X) variables to dependent (or Y) variables. Regression uses data from the past to estimate the relation between costs of objects, which are the dependent variables, and cost drivers, which are the independent variables.

Question 26

Mixed costs:

Answer 26

costs which have both a fixed and variable component.

Question 27

R-square:

Answer 27

the proportion of the variation in the Y or dependent variable (total costs) is explained by the X or independent variable (cost driver). The R-square can vary between 0.00 and 1.00. A value of 0.00 indicates no relation — none of the variance in ¥ is explained by X. However, a value of 1.00 indicates a perfect relation - 100 % of the variation in Y is explained by X. R-square usually lies between the extremes, and it measures how well the regression fits the data. Values close to 1.00 give the cost management analyst confidence that he or she has found a reliable cost driver.

Question 28

Break-even point:

Answer 28

the volume of activity that produces equal revenues and costs for the organization. Benefit = 0

Question 29

Life-cycle costing:

Answer 29

tracks costs attributable to each product or service from start to finish. It provides important information for cost management and pricing.

Question 30

Model elasticity:

Answer 30

We can compare outcome effects by computing the model elasticity, the ratio of the percent- age change in profit divided by the percentage change in an input parameter.

Question 31

Absorption costing:

Answer 31

includes direct material, direct labor, and both variable and fixed manufacturing overhead in the costs of products.

Question 32

Job-order costing:

Answer 32

treats each individual job as the unit of output and assigns costs to it as the job uses resources.

Question 33

Operation costing:

Answer 33

a hybrid of job-order and process costing used by companies that continuously produce many products that have a large proportion of common inputs but that also have observable differences created for different customers.

Question 34

Product-costing system:

Answer 34

accumulates the costs of a production process and assigns them to the products or services that constitute the organization’s output.

Question 35

Throughput costing:

Answer 35

assigns only out-off-pocket spending for direct costs as the costs of products or services.

Question 36

Variable costing:

Answer 36

applies direct material and direct labor costs but only variable manufacturing overhead to products.’