# Accounting 203 Chapter 2

 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. For example, the total 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. 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. 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. 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. Examples of cost objects are 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; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX. Differential Cost A difference in cost between two alternatives. Differential Revenue The 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. 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; activity is the independent variable, as represented by the letter X, in the equation Y = a + bX. 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 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 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 Costs 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. Authordavecowman ID333833 Card SetAccounting 203 Chapter 2 DescriptionManagerial Accounting Updated2017-09-03T01:16:05Z Show Answers