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 caused the incurrence of a variable cost. "Cost Driver." The something that the cost is variable with respect to. Examples are direct labor-hours, machine-hours, units produced, and units sold.
Administration Costs
One of the two categories of nonmanufacturing costs. Include all costs associated with the general management of and organization rather than with manufacturing or selling. Examples include executive compensation, general accounting, secretarial, public r
Appraisal Costs
Inspection costs". Incurred to identify defective products "before" the products are shipped to customers. Doesn't keep defects from happening again. An approach to quality control.
Committed Fixed Costs
Represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Remain largely unchanged in the short term because the costs of restoring them la
Common Cost
A cost that is incurred to support a number of costs objects but cannot be traced to them individually. A type of indirect cost.
Contribution Approach
The crucial distinction between fixed and variable cost. Is used to construct income statements. Clearly distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision making. Separates costs into fixed and variable
Contribution Margin
Sales minus variable expenses. The amount remaining from sales revenues after variable expenses have been deducted. This contributes towards covering fixed expenses and towards profits for the period.
Conversion Cost
The sum of direct labor cost and manufacturing overhead cost. Is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.
Cost Behavior
How cost reacts to changes in the level of activity. Categorized as variable, fixed, or mixed.
Cost Object
Assigned to costs for a variety of purposes including pricing, preparing profitability studies and controlling spending. Anything for which costs data are desired. Classified direct or indirect.
Cost Structure
The relative proportion of each type of cost in an organization.
Dependent Variable
Cost." A variable that responds to some causal factor.
Differential Cost
A difference in costs between any two alternatives. Also known as incremental or decremental costs. Can be either fixed or variable.
Differential Revenues
A difference in revenues between any two alternatives.
Direct Cost
A cost that can be easily and conveniently traced to a specific cost object. Extends beyond just direct materials and direct labor.
Direct Labor
An element of manufacturing cost that consists of labor costs that can easily (physically and conveniently) traced to individual units of product. Also considered as, "Touch Labor" because workers typically touch the product while it is being made.
Direct Materials
An element of manufacturing cost. The raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product.
Discretionary Fixed Costs
Managed Fixed Costs." Arise from annual decisions by management to spend on certain fixed cost items. Include advertising, research, public relations, management development programs, and internships for students. Can be cut for short periods of time wit
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. Material specifications, labor requirements, equipment usage, productio
External Failure Costs
Result when a defective product is delivered to a customer. Includes warranty repairs and replacements, product recalls, liability are rising from legal action against a company and lost sales are rising from reputation of poor quality.
Fixed Cost
A cost that remains constant, in total, regardless of changes in the level of activity, but can be effected if influenced by some outside force. Can be viewed as either "Committed" or "Discretionary.
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 levels of activity.
Incremental Cost
A differential cost. An increase in costs between two alternatives.
Independent Variable
Activity." A variable that acts as a causal factor.
Indirect Cost
A cost that cannot be easily and conveniently traced to a specific cost object.
Indirect Labor
Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience. These costs are treated as part of manufacturing overhead. Examples include: the labor costs of janitors, supervisors, materia
Indirect Materials
The raw materials that are included as part of manufacturing overhead, such as solder, glue, etc.
Internal Failure Costs
Result from identifying defects before they are shipped to consumers.
Inventoriable Costs
Another term for product costs because they are initially assigned to inventories.
ISO 9000 Standards
International Organization for Standardization has established quality guidelines. These guidelines have become "an international measure of quality." The key to receiving certification is documentation that must be so detailed and precise that if all emp
Least-Squares Regression Method
A method of separating a mixed cost into its fixed and variable elements by fitting regression line that minimizes the sum of the squared errors.
Linear Cost Behavior
Whenever a straight line is a reasonable approximation for the relation between cost and activity.
Manufacturing Overhead
An element of manufacturing cost. Includes all manufacturing costs except direct materials and direct labor...items such as indirect materials; indirect labor; maintenance and repairs on production equipment; and heat and light, property taxes, depreciati
Mixed Cost
A cost that contains both variable and fixed cost elements. "Fees paid to the state." A variety of methods are used to estimate the fixed and variable components: account analysis engineering approach, high-low method, and least-squares regression analysi
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another. Not usually found in accounting records. Sacrifice.
Period Costs
All the costs that are not product costs; all selling and administrative expenses. Includes sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices. Not included as part of the cost of either pu
Preventive Costs
Support activities of whose purpose is to reduce the number of defects.
Prime Cost
The sum of direct materials cost and direct labor cost.
Product Costs
A cost that is incurred to acquire or make something that will eventually be sold, then the cost should be recognized as an expense only when the sale takes place...that is, when the benefit occurs. Includes all costs involved in acquiring or making a pro
Quality Circles
Consists of small groups of employees that meet on a regular basis to discuss ways to improve quality. Management and workers are included in these circles.
Quality Cost
Refers to all of the costs that are incurred to prevent defects or that result from defects in products. Four broad groups; prevention costs, appraisal costs, internal failure costs, external failure costs.
Quality Cost Report
A report that details prevention costs, appraisal costs, and the costs of internal and external failures. An initial step in quality improvement programs; provides an estimate of the financial consequences of the company's current level of defects. "An in
Quality of Conformance
The object is to have high quality of conformance. A product that meets or exceeds its designed specifications and is free of defects that mar its appearance or degrade its performance.
R2
A measure of "goodness of fit". A percentage of the variation in the dependent variable cost that is explained by variation in the independent variable. "How good a predictor
Raw Materials
Any materials that are used in the final product; and the finished product of one company can become the raw materials of another company. Can be both direct and indirect materials.
Relevant Range
Narrow band of activity. The range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. Important in understanding fixed costs.
Selling Costs
One of the two categories of nonmanufacturing costs. Include all costs that are incurred to secure customer orders and get the finished product to the customer. "Order-Getting," or "Order-filling Costs." Examples include advertising, shipping, sales trave
Statistical Process Control
A technique that is used to detect whether a process is in or out of control. Charts are used by workers to monitor the quality of units that pass through their work stations.
Sunk Cost
A cost that has already been incurred and that cannot be changed by any decision made now or in the future. Not differential costs. Should be ignored in making decisions.
Variable Cost
A cost that varies, in total, in direct proportion to changes in the level of activity. Constant per unit. For a cost to be variable, it must be variable with respect to something. Total variable costs change as the activity level changes.