Volume
Activity Level
Fixed Cost
Constant Cost in total (f), doesn't change with volume
Variable Cost
Constant Cost (v) per unit, total cost (vX) changes in direct proportion to volume change
Mixed Cost
Costs that have a fixed cost component and a variable cost component (use high-low method to separate)
Total Costs
Sum of fixed costs plus variable costs (f+vX)
Revenue
Constant Revenue (r) per unit, total revenue (rX) changes in direct proportion to volume change
Profit
Total revenue (rX) minus Total costs (f+vX)
Contribution Margin Per Unit
Revenue per unit-Variable cost per unit (r-v)
Total Contribution Margin
Total Revenues (rX)- Total variable costs (vX), or (r-v)X
Break-Even Point
Unit sales volume to earn zero profit [f/(r-x)]
Target Profit Point
Unit sales volume to earn target profit [(f + target profit) / (r-v)]
Avoidable Costs
Costs that must be incurred to perform an activity at a given level, but that can be avoided if that activity is reduced or discontinued
Incremental Costs
Cost increases resulting from the performance of an additional activity
Opportunity Costs
Profits that a company forgoes by following a particular course of action
Relevant Costs
Future costs that will change as a result of a decision
Relevant Revenues
Future revenues that will change as a result of a decision
Average Cost Method
Assigns the total costs of direct materials and conversion separately to products at the average costs per equivalent unit by adding the amount of each type of cost in the beginning inventory to the amount of that cost type incurred during the month
Conversion Costs
Direct labor and factory overhead costs necessary to convert raw materials into a finished product
Cost Accounting (Cost Analysis)
Process of determining and evaluating the costs of specific products or activities of a company
Equivalent Units
Physical products multiplied by their average percentage of completion
Job Order
Unique product or group of products being manufactured
Job Order Cost Accounting System
Keeps track of the costs applied to each job order
Predetermined overhead rate
Budgeted factory overhead cost divided by budgeted total volume of manufacturing activity for the year
Process Cost Accounting System
Keeps track of the costs applied to identical units of a product as they move through one or more manufacturing processes
Activity-Based Costing (ABC)
System which allocates factory overhead to units of product; first allocates factory overhead costs to activity pools, then assigns costs in each activity pool to jobs based on the relative number of activities needed to complete the jobs, and finally ass
Activity-Based Management
The technique of managing a company's activities to increase its customers' satisfaction and to increase its profits either through increased revenues or reduced costs
Activity Pool
Grouping of related activities involving factory overhead
Appraisal Costs
Costs of catching product defects inside the company
Back-Flush Costing
System of costing where a company record its product costs directly in cost of goods sold and then "backs out" the costs of the finished goods still on hand at the end of an accounting period
Balanced Scorecard
A technique that links competitive strategies with specific measures of the success of the strategies
Benchmarking
A technique that allows the company to compare its operations against its most successful competitors by measuring its own practices against the best practices (benchmarks) occurring in the industry in which it operates
Cost Drivers
Activities on which a company bases activity pools
External Failure Costs
Costs to a company of flaws in products that reach the company's customers
Flexible Manufacturing Systems
Computerized networks of automated equipment that use computer software to control such tasks as machine setups, direct materials and parts selection, and product assembly
Internal Failure Costs
Costs of reworking deceptive products, replacement parts and materials, and time that the factory is "down" while employees trace and fix the cause of the defects
ISO 9000
Set of quality standards set up by the International Organization for Standardization
Just-in-time Strategies
Reducing or eliminating inventories, streamlining the factory and increasing operational efficiencies, and controlling quality
Prevention Costs
Costs to a company of preventing flaws and defects in its products
Product Defect Rates
Percentage of defective products manufactured
Pull-Through Production
Customers' orders "pull" products through a company's production process, from the customers' orders backward through the production process to the purchase of raw materials
Push-Through Production
Sales forecast "pushes" the products through a company's production process
Total Quality Management (TQM)
Management philosophy or approach that focuses on a company's customers to foster continuous improvement
Special Order
A) Determine Incremental Revenues
B) Determine Incremental Costs
C) Accept if incremental Revenues > Incremental Costs
Dropping Unprofitable Product
A) Compare Avoidable costs to lost revenues
B) Drop product only if total avoidable costs > lost revenue from dropping product
Make or Buy Decision
A) Determine relevant variable and fixed costs of making or buying
B) Consider supplier reliability and quality; consider our reliability and quality
C) If reliability and quality are about the same, select alternative with lowest cost per unit
Sell or Process Further Decision
A) Determine relevant revenues from selling or processing further
B) Determine relevant variable and fixed costs (including opportunity costs) from selling or from processing further
C) Select alternative with "higher" incremental profit
Product Mix Decision
Advertising- Compare incremental total contribution margin to incremental fixed advertising costs
Production- for each product, determine the contribution margin per unit of scarce resource. Allocate scarce resource in sequential order (starting with prod