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Accounting Exam #2

chapters 2-6

QuestionAnswer
cost behavior how the activities of an organization affect its cost.
cost drivers any output measure that causes the use of costly resources.
variable cost a cost that changes in direct proportion to changes in the cost driver level.
fixed cost a cost that is not immediately affected by changes in the cost driver level.
relevant range the limit of cost driver level within which a specific relationship between costs and the cost driver is valid.
CVP (cost volume profit analysis) the study of the effects of output volume on revenue, expenses, and net income.
break even point the level of sales at which revenue equals expenses and net income is zero.
unit contribution margin/marginal income the sales price per unit minus the variable cost per unit.
total contribution margin total number of units sold times the unit contribution margin.
variable cost percentage total variable costs divided by total sales.
contribution margin percentage total contribution margin divided by sales or one hundred percent minus the variable cost percentage.
variable cost ratio variable cost percentage expressed as a ratio.
contribution margin ratio contribution margin percentage expressed as a ratio.
sales mix the relative proportions or combinations of quantities of products that constitute total sales.
incremental effect the change in total results (such as revenue, expenses, or income) under a new condition in comparison with some given or known condition.
operating leverage a firm's ratio of fixed to variable costs.
margin of safety the planned unit sales less the break even unit sales; it can show how far sales can fall below the planned level before losses occur.
measurement of cost behavior understanding and quantifying how activities of an organizations affect its levels of costs.
linear cost behavior activity that can be graphed with a straight line because costs are assumed to be either fixed or variable.
step cost costs that change abruptly at different at different intervals of activity because the resources and their costs come in indivisible chunks.
mixed costs costs that contain elements of both fixed and variable cost behavior.
capacity costs the fixed costs of being able to achieve a desired level of production or to provide a desired level of service while maintaining product or service attributes, such as quality.
committed fixed costs costs arising from the possession of facilities, equipment, and a basic organization.
discretionary fixed costs costs determined by mgmt as part of the periodic planning process in order to meet the organization's goals.
cost measurement estimating or predicting costs as a function of appropriate cost drivers.
activity analysis the process of identifying appropriate cost drivers and their effects on the costs of making a product or providing a service.
engineering analysis the systematic review of materials, supplies, labor, support services, and facilities needed for products and services; measuring cost behavior according to what costs should be, not by what costs have been.
account analysis classifying each account as a variable cost or as a fixed cost with respect to a selected cost driver.
high low method a simple method for measuring a linear cost function from past cost data, focusing on the highest activity and lowest activity points and fitting a line through these two points.
visual fit method a method in which the cost analyst visually fits a straight line through a plot of all the available data.
least squares regression measuring a cost function objectively by using statistics to fit a cost function to all the data.
coefficient of determination a measurement of how much of the fluctuation of a cost is explained by changes in the driver.
CMS (cost mgmt system) a collection of tools and techniques that identify how mgmt's decisions affect costs.
cost accounting that part of the CMS that measures costs for the purposes of mgmt decision making and financial reporting.
cost a sacrifice or giving up of resources for a particular purpose.
cost objective anything for which decision makers desire a separate measurement of costs.
cost accounting systems the techniques used to determine the cost of a product, service, customer, or other cost object.
cost accumulation collecting costs by some natural classification, such as activities performed, labor, or materials.
cost assignment attaching costs to one or more cost objects, such as activities, departments, customers, or products.
direct costs costs that accountants can identify specifically and exclusively with a given cost object in an economically feasible way.
tracing physically identifying the amount of a direct cost that relates exclusively to a particular cost object.
indirect costs costs that accountants cannot identify specifically and exclusively with a given cost object in an economically feasible way.
cost allocation assigning indirect costs to cost objects in proportion to the cost object's use of a particular cost allocation base.
cost allocation base a measure of input or output that determines the amount of cost to be allocated to a particular cost object.
cost pool a group of individual costs that a company allocates to cost objects using using a single cost allocation base.
unallocated costs costs than an accounting system records but does not allocate to any cost object.
direct material costs the acquisition costs of all materials that a company identifies as a part of the manufactured goods and traces to the manufactured goods in an economically feasible way.
direct labor costs the wages of all labor that a company can trace specifically and exclusively to the manufactured goods in an economically feasible way.
indirect production costs all costs associated with the production process that a company cannot trace to the goods or services produced in an economically feasible way. all production costs except direct labor and direct materials.
product costs costs identified with goods produced or purchased for resale.
period costs costs that become expenses during the current period without becoming part of inventory.
direct material inventory material on hand and awaiting use in the production process.
work in progress inventory goods undergoing the production process but not yet fully completed.
finished goods inventory goods fully completed but not yet sold.
traditional costing systems accounting systems that do not accumulate or report costs of activities or processes. they often use a single cost pool for all indirect manufacturing costs with a labor based cost allocation base.
ABC (activity based costing systems) a system that first accumulates indirect resource costs for each of the activities of the area being costed, and then assigns the the costs of each activity to the products, services, or other cost objects that require that activity.
process map a schematic diagram capturing interrelationships between cost objects, activities, and resources.
two stage ABC system a costing system with two stages of allocation to get from the original indirect resource cost to the final product or service cost.
ABM (activity based mgmt) using the output of an activity based cost accounting system to aid strategic decision making and to improve operational control of an organization.
value added cost the necessary cost of an activity that cannot be eliminated without affecting a product's value to the customer.
non value added costs costs that a company can eliminate without affecting a product's value to the customer.
benchmarking the continuous process of comparing products, services, and activities against the best industry standards.
GPK a German cost accounting system that goes a step further than ABC systems.
relevant information the predicted future costs and revenues that will differ among alternative courses of action.
decision model any method for making a choice, sometimes requiring elaborate quantitative procedures.
absorption approach a costing approach that considers all indirect manufacturing costs to be product costs that become an expense in the form of manufacturing cost of goods sold only as sales occur.
contribution approach a method of internal reporting that emphasizes the distinction between variable and fixed costs for the purpose of better decision making.
perfect competition a market in which a firm can sell as much of a product as it can produce, all at a single market price.
marginal cost the additional cost resulting from producing and selling one additional unit.
marginal revenue the additional revenue resulting from the sale of an additional unit.
imperfect competition a market in which the price a firm charges for a unit will influence the quantity of units it sells.
price elasticity the effect of price changes on sales volume.
predatory pricing establishing prices so low that they drive competitors out of the market.
discriminatory pricing charging different prices to different customers for the same product or service.
markup the amount by which price exceeds cost.
full cost the total of all manufacturing costs plus the total of all selling and administrative costs.
target costing taking a product's market price as given and determining the maximum cost the company can spend to make the product and still achieve the desired profitability.
value engineering a cost reduction technique, used primarily during design, that uses info about all value chain functions to satisfy customer needs while reducing costs.
kaizen costing the Japanese term for continuous improvement during manufacturing.
differential cost the difference in total cost between two alternatives.
differential revenue the difference in total revenue between two alternatives.
incremental analysis an analysis of the incremental costs and benefits of a proposed alternative compared with a given alternative.
incremental costs the additional costs or reduced benefits generated by the proposed alternative in comparison with a given alternative.
incremental benefits the additional revenues or reduced costs generated by the proposed alternative in comparison with a given alternative.
outlay cost a cost that requires a future cash disbursement.
opportunity cost for a resource that a company owns or that is has already committed to purchase, the maximum available contribution to profit forgone by using such a resource for a particular purpose.
outsourcing purchasing products or services from an outside supplier.
avoidable costs costs that will not continue if an ongoing operation is changed or deleted.
unavoidable costs costs that will continue even if a company discontinues an operation.
common costs those costs of facilities and services that are shared by users.
limiting factor the item that restricts or constrains the production or sale of a product or service.
inventory turnover the number of times the average inventory is sold per year.
joint products two or more manufactured products that have relatively significant sales values and are not separately identifiable as individual products until their split off point.
split off point the juncture of manufacturing where the joint products become individually identifiable.
separable costs any cost beyond the split off point.
joint costs the costs of manufacturing joint products prior to the split off point.
depreciation the periodic cost of equipment that a company spreads over the future periods in which the company will use the equipment.
book value the original cost of equipment less accumulated depreciation.
accumulated depreciation the sum of all depreciation charged to past periods.
sunk cost a historical or past cost, that is, a cost that the company has already incurred and therefore, is irrelevant to the decision making process.
Created by: freisak