Managerial Ch 02 - Cost Concepts

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. (p. 35)

Question 2

Activity base

Answer 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. (p. 29)

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. (p. 26)

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. (p. 31)

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. 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 (p. 44)

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. (p. 43)

Question 7

Contribution margin

Answer 7

The amount remaining from sales revenues after all variable expenses have been deducted. (p. 43)

Question 8

Conversion cost

Answer 8

Direct labor cost plus manufacturing overhead cost. (p. 27)

Question 9

Cost behavior

Answer 9

The way in which a cost reacts to changes in the level of activity. (p. 29)

Question 10

Cost object

Answer 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. (p. 43) Encompasses both direct (labor and material) and indirect costs (manufacturing overhead)

Question 11

Cost structure

Answer 11

The relative proportion of fixed, variable, and mixed costs in an organization. (p. 29)

Question 12

Dependent variable

Answer 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. (p. 35)

Question 13

Differential cost

Answer 13

A difference in cost between two alternatives. Also see Incremental cost. (p. 44)

Question 14

Differential revenue

Answer 14

The difference in revenue between two alternatives. (p. 44)

Question 15

Direct cost

Answer 15

A cost that can be easily and conveniently traced to a specified cost object. Such as direct labor or direct material. (p. 44)

Question 16

Direct labor

Answer 16

Factory labor costs that can be easily traced to individual units of product. Also called touch labor. (p. 25)

Question 17

Direct materials

Answer 17

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it. (p. 25)

Question 18

Discretionary fixed costs

Answer 18

Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research. (p. 31)

Question 19

Engineering approach

Answer 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. (p. 35)

Question 20

Fixed cost

Answer 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

Question 21

High-low method

Answer 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. (p. 39)

Question 22

Incremental cost

Answer 22

An increase in cost between two alternatives. Also see Differential cost. (p. 44)

Question 23

Independent variable

Answer 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. (p. 36)

Question 24

Indirect cost

Answer 24

A cost that cannot be easily and conveniently traced to a specified cost object. (p. 44)

Question 25

Indirect labor

Answer 25

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. (p. 25)

Question 26

Indirect materials

Answer 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. (p. 25)

Question 27

Inventoriable costs

Answer 27

Synonym for product costs. (p. 27)

Question 28

Least-squares regression method

Answer 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. (p. 40)

Question 29

Linear cost behavior

Answer 29

Cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity. (p. 36)

Question 30

Manufacturing overhead

Answer 30

All manufacturing costs except direct materials and direct labor. (p. 26)

Question 31

Mixed cost

Answer 31

A cost that contains both variable and fixed cost elements. (p. 33)

Question 32

Opportunity cost

Answer 32

The potential benefit that is given up when one alternative is selected over another. (p. 45)

Question 33

Period costs

Answer 33

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. (p. 27)

Question 34

Prime cost

Answer 34

Direct materials cost plus direct labor cost. (p. 27)

Question 35

Product costs

Answer 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. (p. 27)

Question 36

Raw materials

Answer 36

Any materials that go into the final product. (p. 25)

Question 37

Relevant range

Answer 37

The range of activity within which assumptions about variable and fixed cost behavior are valid. (p. 32)

Question 38

Selling costs

Answer 38

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer. (p. 26)

Question 39

Sunk cost

Answer 39

A cost that has already been incurred and that cannot be changed by any decision made now or in the future. Should be ignored when decision making because it is irrelevant. (p. 46)

Question 40

Variable cost

Answer 40

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit. (p. 29)