Key Terms-Chapter 2

Question 1

Account Analysis

Answer 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.

Question 2

Activity Base

Answer 2

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

Question 3

Administrative Costs

Answer 3

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

Question 4

Committed Fixed Costs

Answer 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.

Question 5

Common Cost

Answer 5

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually.

Question 6

Contribution Approach

Answer 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.

Question 7

Contribution Margin

Answer 7

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

Question 8

Conversion Cost

Answer 8

Direct Labor cost plus manufacturing overhead cost.

Question 9

Cost Behavior

Answer 9

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

Question 10

Cost Object

Answer 10

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

Question 11

Cost Structure

Answer 11

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

Question 12

Dependent Variable

Answer 12

A variable that responds to some causal factor (Y output).

Question 13

Differential Cost

Answer 13

A difference in revenue between two alternatives.

Question 14

Direct Cost

Answer 14

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

Question 15

Direct Labor

Answer 15

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

Question 16

Direct Materials

Answer 16

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

Question 17

Discretionary Fixed Costs

Answer 17

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

Question 18

Engineering Approach

Answer 18

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.

Question 19

Fixed Cost

Answer 19

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.

Question 20

High-Low Method

Answer 20

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.

Question 21

Incremental Cost

Answer 21

An increase in cost between two alternatives.

Question 22

Independent Variable

Answer 22

A Variable that acts as a causal factor (X input).

Question 23

Indirect Cost

Answer 23

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

Question 24

Indirect Labor

Answer 24

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

Question 25

Indirect Materials

Answer 25

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.

Question 26

Inventoriable Costs

Answer 26

Synonym for product costs.

Question 27

Least-Squares Regression Method

Answer 27

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.

Question 28

Linear Cost Behavior

Answer 28

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

Question 29

Manufacturing Overhead

Answer 29

All manufacturing costs except direct materials and direct labor.

Question 30

Mixed Cost

Answer 30

A cost that contains both variable and fixed cost elements.

Question 31

Opportunity Cost

Answer 31

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

Question 32

Period Costs

Answer 32

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

Question 33

Prime Cost

Answer 33

Direct materials cost plus direct labor cost.

Question 34

Product Cost

Answer 34

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.

Question 35

Raw materials

Answer 35

Any materials that go into the final product.

Question 36

relevant Range

Answer 36

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

Question 37

Selling costs

Answer 37

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

Question 38

Sunk Cost

Answer 38

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

Question 39

Variable Cost

Answer 39

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

Question 40

Appraisal Costs

Answer 40

Costs that are incurred to identify defective products before the products are shipped to customers.

Question 41

External Failure Costs

Answer 41

Costs that are incurred when a product or service that is defective is delivered to a customer.

Question 42

Internal Failure Costs

Answer 42

Costs that are incurred as a result of identifying defective products before they are shipped to customers.

Question 43

ISO 9000 Standard

Answer 43

Quality control requirements issued by the International Organization for Standardization that relate to products sold in European countries.

Question 44

Prevention Costs

Answer 44

Costs that are incurred to keep defects from occurring.

Question 45

Quality Circles

Answer 45

Small groups of employees that meet on a regular basis to discuss ways of improving quality.

Question 46

Quality Cost

Answer 46

Costs that are incurred to prevent defective products from falling into the hands of customers or that are incurred as a result of defective units.

Question 47

Quality Cost Report

Answer 47

A report that details prevention costs, appraisal costs, and the costs of internal and external failures.

Question 48

Quality of Conformance

Answer 48

The degree to which a product or service meets or exceeds its design specifications and is free of defects or other problems that mar its appearance or degrade its performance.

Question 49

Statistical Process Control

Answer 49

A charting technique used to monitor the quality of work being done in a workstation for the purpose of immediately correcting any problems.

Question 50

Common-Size Financial Statements

Answer 50

A statement that shows the items appearing on it in percentage form as well as in dollar form. On the income statement, the percentages are based on total sales revenue; on the balance sheet, the percentages are based on total assets.

Question 51

Financial Leverage

Answer 51

A difference between the rate of return on assets and the rate paid to creditors.

Question 52

Horizontal Analysis

Answer 52

A side-by-side comparison of two or more years’ financial statements (Trend Analysis).

Question 53

Vertical Analysis

Answer 53

The presentation of a company’s financial statements in common-size form.