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Account Analysis

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

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Activity Base

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A measure of whatever causes the incurrence of a variable cost. IE a total cost of an Xray film in a hospital will increase as the number of Xrays taken increases.

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Administrative Costs

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All executive, organizational, and clerical, costs associates with the general management of an organization rather than with manufacturing/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 Costs

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A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. IE: wage cost of a pilot to all of the passengers.

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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.

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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 costs plus manufacturing overhead

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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 are products, customers, jobs, and parts of the organization such as departments

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Differential Cost

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The difference in cost between two alternatives.

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Direct cost

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A cost that can be easily and conveniently traced to a specific 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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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 eval 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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Cost that remains constant in total, regardless of changes in the level of activity within the relevant range.

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High low method

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A method of separating a mixed cost into its fixed and variable elements.

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Incremental cost

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An increase in cost between two alternatives.

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Indirect cost

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A cost that cannot be easily and conveniently traced 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 easily or conveniently traced to it.

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Indirect materials

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Small items of material such as glue, and nails that may be an integral part of finished product, but not easily or conveniently traced to it.

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Linear Cost Behavior

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Cost behavior is said to be linear whenever a straight line is 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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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 material 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. Direct materials, direct labor, and manufacturing overhead.

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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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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. Constant per unit.

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Variable cost per unit

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When using high low method, the change in cost divided by the change in units equals

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True

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T/F Nonmanufacturing costs are period costs

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True

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T/F Period costs are expensed in the same period in which they are incurred.

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Product cost

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Inventoriable costs are also known as

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sales revenue variable cost

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Contribution margin is ____ - ____

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True

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T/F The equation for a straight-line can be used to express the relationship between mixed costs and the level of activity.

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False

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T/F Management cannot use accounting analysis when trying to estimate the components of mixed cost.

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False

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T/F The fixed portion of mixed cost represents the cost incurred for the actual consumption of a service.

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True

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T/F When Mixed costs are represented by a straight-line, the steeper the slope, the higher the variable cost per unit.

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True

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T/F A mixed cost has a minimum cost of having a service available and ready for use.

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False (within the range)

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T/F The equation for a straight-line makes it easy to calculate the total mixed cost for any activity level outside the relevant range.

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Discretionary, committed

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_____ fixed costs can be cut-back or eliminated without significant damage to goals. _____ fixed costs are not easily changed or eliminated.

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True

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T/F Compared to traditional statements, contribution format statements provide management with a tool to make decision making easier.

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True

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T/F Traditional income statements focus on cost function. Contribution format statements focus on cost behavior.

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False

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T/F The traditional income statement is for internal use, while the contribution format income statement is for external.

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Variable

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When using the high-low method, the slope of the line equals the ____ cost per unit of activity.

Managerial Accounting Chapter 2 Answers – Flashcards

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