Key Terms-Chapter 2 Flashcards
Account Analysis
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.
Activity Base
A measure of whatever causes the incurrence of a variable cost.
Administrative Costs
All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling.
Committed Fixed Costs
Investments in facilities, equipment, and basic organizational structure that can’t be significantly reduced even for short periods of time without making fundamental changes.
Common Cost
A cost that is incurred to support a number of cost objects but that cannot be traced to them individually.
Contribution Approach
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.
Contribution Margin
The amount remaining from sales revenues after all variable expenses have been deducted.
Conversion Cost
Direct Labor cost plus manufacturing overhead cost.
Cost Behavior
The way in which a cost reacts to changes in the level of activity.
Cost Object
Anything for which cost data are desired (products, customers, jobs, and parts of the organization such as departments or divisions).
Cost Structure
The relative proportion of fixed, variable, and mixed costs in an organization.
Dependent Variable
A variable that responds to some causal factor (Y output).
Differential Cost
A difference in revenue between two alternatives.
Direct Cost
A cost that can be easily and conveniently traced to a specified cost object.
Direct Labor
Factory labor costs that can be easily traced to individual units of product (also called touch labor).
Direct Materials
Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.
Discretionary Fixed Costs
Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.
Engineering Approach
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.
Fixed Cost
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.
High-Low Method
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.
Incremental Cost
An increase in cost between two alternatives.
Independent Variable
A Variable that acts as a causal factor (X input).
Indirect Cost
A cost that cannot be easily and conveniently traced to a specified cost object.
Indirect Labor
The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.
Indirect Materials
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.
Inventoriable Costs
Synonym for product costs.
Least-Squares Regression Method
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.
Linear Cost Behavior
Cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity.
Manufacturing Overhead
All manufacturing costs except direct materials and direct labor.
Mixed Cost
A cost that contains both variable and fixed cost elements.
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another.
Period Costs
Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued.
Prime Cost
Direct materials cost plus direct labor cost.
Product Cost
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.
Raw materials
Any materials that go into the final product.
relevant Range
The range of activity within which assumptions about variable and fixed cost behavior are valid.
Selling costs
All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer.
Sunk Cost
A cost that has already been incurred and that cannot be changed by any decision made now or in the future.
Variable Cost
A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.
Appraisal Costs
Costs that are incurred to identify defective products before the products are shipped to customers.
External Failure Costs
Costs that are incurred when a product or service that is defective is delivered to a customer.
Internal Failure Costs
Costs that are incurred as a result of identifying defective products before they are shipped to customers.
ISO 9000 Standard
Quality control requirements issued by the International Organization for Standardization that relate to products sold in European countries.
Prevention Costs
Costs that are incurred to keep defects from occurring.
Quality Circles
Small groups of employees that meet on a regular basis to discuss ways of improving quality.
Quality Cost
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.
Quality Cost Report
A report that details prevention costs, appraisal costs, and the costs of internal and external failures.
Quality of Conformance
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.
Statistical Process Control
A charting technique used to monitor the quality of work being done in a workstation for the purpose of immediately correcting any problems.
Common-Size Financial Statements
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.
Financial Leverage
A difference between the rate of return on assets and the rate paid to creditors.
Horizontal Analysis
A side-by-side comparison of two or more years’ financial statements (Trend Analysis).
Vertical Analysis
The presentation of a company’s financial statements in common-size form.
