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Account Analysis

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A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analysts prior knowledge of how the cost in the account behaves.

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Activity Base

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A measure of whatever causes the incurrence of a variable cost. For example, the cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X-Rays is the activity base that explains the total cost of X-Ray Film.

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Administrative Costs

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

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Committed Fixed Costs

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Investments in facilities, equipment, and basic organizational structure that can't be significantly reduced even for short periods of time without making fundamental changes.

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Common Cost

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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 passengers. But no part of the pilot's wage is caused by any one passenger taking the flight.

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Contribution Approach

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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 reported purposes.

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Contribution Margin

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

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Conversion Cost

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Direct labor cost plus manufacturing overhead cost.

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Cost Behavior

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

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Cost Object

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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.

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Cost Structure

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

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Dependent Variable

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...

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Differential Cost

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A difference in cost between two alternatives.

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Differential Revenue

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The difference in revenue between two alternatives.

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Direct Cost

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

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Direct Labor

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Factory labor costs that can be easily traced to individual units of product.

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Direct Materials

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

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Discretionary Fixed Costs

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

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Engineering Approach

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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.

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Fixed Cost

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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.

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High-Low Method

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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.

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Incremental Cost

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An increase in cost between two alternatives.

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Independent Variable

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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.

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Indirect Cost

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

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Indirect Labor

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

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Indirect Materials

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Small items of materials 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.

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Least-Squares Regression Method

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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.

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Linear Cost Behavior

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

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Manufacturing Overhead

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All manufacturing costs except direct materials and direct labor.

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Mixed Cost

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A cost that contains both variable and fixed cost elements.

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Opportunity Cost

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

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Period Costs

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

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Prime Cost

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Direct materials cost plus direct labor cost.

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Product Costs

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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.

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Raw Materials

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Any materials that go into the final product.

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Relevant Range

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

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Selling Costs

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

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Sunk Cost

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

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Variable Cost

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

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Budget

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A detailed plan for the future that is usually expressed in formal quantitative terms.

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Business Process

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A series of steps that are followed in order to carry out some task in a business.

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Constraint

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Anything that prevents you from getting more of what you want.

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Controlling

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The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change.

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Corporate Social Responsibility

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A concept whereby organizations consider the needs of all stakeholders when making decisions.

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Decision Making

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Selecting a course of action from competing alternatives.

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Enterprise Risk Management

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A process used by a company to identify its risks and develop responses to them that enable it to be reasonably assured of meeting its goals.

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Financial Accounting

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The phase of accounting that is concerned with reporting historical financial information to external parties, such as stockholders, creditors, and regulators.

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Lean Production

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A management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders.

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Managerial Accounting

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The phase of accounting that is concerned with providing information to managers for use within the organization.

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Performance Report

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A report that compares budgeted data to actual data to highlight instances of excellent and unsatisfactory performance.

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Planning

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The process of establishing goals and specifying how to achieve them.

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Segment

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A part or activity of an organization about which managers would like cost, revenue, or competitors.

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Strategy

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A company's "game plan" for attracting customers by distinguishing itself from competitors.

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Theory of Constraints

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A management approach that emphasizes the importance of managing constraints.

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Value Chain

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The major business functions that add value to a company's products and services, such as research and development, product design, manufacturing, marketing, distribution, and customer service.

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Absorption Costing

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A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed overhead—as part of the cost of a product. This term is synonymous with full cost.

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Allocation Base

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A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects.

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Bill of Materials

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A document that shows the quantity of each type of direct material required to make a product.

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Cost Driver

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A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

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Cost of Goods Manufactured

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The manufacturing costs associated with the goods that were finished during the period

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Finished Goods

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Units of product that have been completed but have not yet been sold to customers.

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Job Cost Sheet

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A form prepared for a job that records the materials, labor, and manufacturing overhead costs charged to that job

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Job-Order Costing

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a costing system used in situations where many different products, jobs, or services are produced each period

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Materials Requisition Form

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A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials.

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Multiple Predetermined Overhead Rates

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A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead cost pool.

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Normal Cost System

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a costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job

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Over Applied Overhead

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a credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to work in process exceeds the amount of overhead cost actually incurred during a period

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Overhead Application

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the process of charging manufacturing overhead cost to job cost sheets and to the Work in Process account

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Plantwide Overhead Rate

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A single predetermined overhead rate that is used throughout a plant

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Predetermined Overhead Rate

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A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period

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Raw Materials

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Any materials that go into the final product.

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Schedule of Cost of Goods Manufactured

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A schedule that contains three elements of product costs - direct materials, direct labor, and manufacturing overhead - and that summarizes the portions of those costs that remain in ending finished goods inventory and that are transferred out of finished goods into cost of goods sold.

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Schedule of Cost of Goods Sold

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A schedule that contains three elements of product costs - direct materials, direct labor, and manufacturing overhead - and that summarizes the portions of those costs that remain in ending finished goods inventory and that are transferred out of finished goods into cost of goods sold.

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Time Ticket

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A document that is used to record the amount of time an employee spends on various activities

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Underapplied Overhead

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A debit balance in the manufacturing overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to work in process during a period

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Work in Process

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Units of product that are only partially complete and will require further work before they are ready for sale to a customer.

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