Budget
A detailed plan for the future that is usually expressed in formal quantitative terms. (p. 3)
Business process
A series of steps that are followed in order to carry out some task in a business. (p. 11)
Constraint
Anything that prevents you from getting more of what you want. (p. 12)
Controlling
The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change. (p. 3)
Corporate social responsibility
A concept whereby organizations consider the needs of all stakeholders when making decisions. (p. 17)
Decision making
Selecting a course of action from competing alternatives. (p. 3)
Enterprise risk management
A process used by a company to identify its risks and develop responses to them that enable it to be reasonably assured of meeting its goals. (p. 9)
Financial accounting
The phase of accounting that is concerned with reporting historical financial information to external parties, such as stockholders, creditors, and regulators. (p. 2)
Lean Production
A management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders. (p. 11)
Managerial accounting
The phase of accounting that is concerned with providing information to managers for use within the organization. (p. 2)
Performance report
A report that compares budgeted data to actual data to highlight instances of excellent and unsatisfactory performance. (p. 4)
Planning
The process of establishing goals and specifying how to achieve them. (p. 3)
Segment
A part or activity of an organization about which managers would like cost, revenue, or profit data. (p. 3)
Strategy
A company's "game plan" for attracting customers by distinguishing itself from competitors. (p. 8)
Theory of Constraints
A management approach that emphasizes the importance of managing constraints. (p. 12)
Value chain
The major business functions that add value to a company's products and services, such as research and development, product design, manufacturing, marketing, distribution, and customer service. (p. 11)
Corporate governance
The system by which a company is directed and controlled. (p. 20)
Detective control
A control that detects undesirable events that have already occurred. (p. 22)
Internal control
A process designed to provide reasonable assurance that objectives are being achieved. (p. 21)
Preventive control
A control that deters undesirable events from occurring. (p. 22)
Sarbanes-Oxley Act of 2002
A law intended to protect the interests of those who invest in publicly traded companies by improving the reliability and accuracy of corporate financial reports and discloures. (p. 20)
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. (p. 35)
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 cos
Administrative costs
All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling. (p. 26)
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. (p. 31)
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
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. (p. 43)
Contribution margin
The amount remaining from sales revenues after all variable expenses have been deducted. (p. 43)
Conversion cost
Direct labor cost plus manufacturing overhead cost. (p. 27)
Cost behavior
The way in which a cost reacts to changes in the level of activity. (p. 29)
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. (p. 43)
Cost structure
The relative proportion of fixed, variable, and mixed costs in an organization. (p. 29)
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. (p. 35)
Differential cost
A difference in cost between two alternatives. Also see Incremental cost. (p. 44)
Differential revenue
The difference in revenue between two alternatives. (p. 44)
Direct cost
A cost that can be easily and conveniently traced to a specified cost object. (p. 44)
Direct labor
Factory labor costs that can be easily traced to individual units of product. Also called touch labor. (p. 25)
Direct materials
Materials that become an integral part of a finished product and whose costs can be conveniently traced to it. (p. 25)
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. (p. 31)
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. (p. 35)
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. (p. 30)
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. (p. 39)
Incremental cost
An increase in cost between two alternatives. Also see Differential cost. (p. 44)
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. (p. 36)
Indirect cost
A cost that cannot be easily and conveniently traced to a specified cost object. (p. 44)
Indirect labor
The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. (p. 25)
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. (p. 25)
Inventoriable costs
Synonym for product costs. (p. 27)
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. (p. 40)
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. (p. 36)
Manufacturing overhead
All manufacturing costs except direct materials and direct labor. (p. 26)
Mixed cost
A cost that contains both variable and fixed cost elements. (p. 33)
Opportunity cost
The potential benefit that is given up when one alternative is selected over another. (p. 45)
Period costs
Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. (p. 27)
Prime cost
Direct materials cost plus direct labor cost. (p. 27)
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. Also see Inventoriable costs. (p. 27)
Raw materials
Any materials that go into the final product. (p. 25)
Relevant range
The range of activity within which assumptions about variable and fixed cost behavior are valid. (p. 32)
Selling costs
All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer. (p. 26)
Sunk cost
A cost that has already been incurred and that cannot be changed by any decision made now or in the future. (p. 46)
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. (p. 29)
Appraisal costs
Costs that are incurred to identify defective products before the products are shipped to customers. (p. 74)
External failure costs
Costs that are incurred when a product or service that is defective is delivered to a customer. (p. 74)
Internal failure costs
Costs that are incurred as a result of identifying defective products before they are shipped to customers. (p. 74)
ISO 9000 standards
Quality control requirements issued by the International Organization for Standardization that relate to products sold in European countries. (p. 78)
Prevention costs
Costs that are incurred to keep defects from occurring. (p. 73)
Quality circles
Small groups of employees that meet on a regular basis to discuss ways of improving quality. (p. 74)
Quality cost
Costs that are incurred to prevent defective products from falling into the hands of customers or that are incurred as a result of defective units. (p. 73)
Quality cost report
A report that details prevention costs, appraisal costs, and the costs of internal and external failures. (p. 76)
Quality of conformance
The degree to which a product or service meets or exceeds its design specifications and is free of defects or other problems that mar its appearance or degrade its performance. (p. 72)
Statistical process control
A charting technique used to monitor the quality of work being done in a workstation for the purpose of immediately correcting any problems. (p. 74)
Absorption costing
A costing method that includes all manufacturing costs�direct materials, direct labor, and both variable and fixed manufacturing overhead�in the cost of a product. (p. 84)
Allocation base
A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects. (p. 89)
Bill of materials
A document that shows the quantity of each type of direct material required to make a product. (p. 86)
Cost driver
A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs. (p. 91)
Cost of goods manufactured
The manufacturing costs associated with the goods that were finished during the period. (p. 93)
Finished goods
Units of product that have been completed but not yet sold to customers. (p. 93)
Job cost sheet
A form that records the materials, labor, and manufacturing overhead costs charged to a job. (p. 86)
Job-order costing
A costing system used in situations where many different products, jobs, or services are produced each period. (p. 84)
Materials requisition form
form A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials. (p. 86)
Multiple predetermined overhead rates
A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead co
Normal cost system
A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job. (p. 90)
Overapplied overhead
A credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually incurred during a period. (p. 103)
Overhead application
The process of charging manufacturing overhead cost to job cost sheets and to the Work in Process account. (p. 89)
Plantwide overhead rate
A single predetermined overhead rate that is used throughout a plant. (p. 107)
Predetermined overhead rate
rate A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base f
Raw materials
Any materials that go into the final product. (p. 93)
Schedule of cost of goods manufactured
A schedule that contains three elements of product costs�direct materials, direct labor, and manufacturing overhead�and that summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Pro
Schedule of cost of goods sold
A schedule that contains three elements of product costs�direct materials, direct labor, and manufacturing overhead�and that summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goo
Time ticket
A document that is used to record the amount of time an employee spends on various activities. (p. 87)
Underapplied overhead
A debit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period. (p. 103)
Work in process
Units of product that are only partially complete and will require further work before they are ready for sale to the customer. (p. 93)
Conversion cost
Direct labor cost plus manufacturing overhead cost. (p. 148)
Equivalent units
The product of the number of partially completed units and their percentage of completion with respect to a particular cost. Equivalent units are the number of complete whole units that could be obtained from the materials and effort contained in partiall
Equivalent units of production (weighted-average method)
The units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department's ending work in process inventory. (p. 148)
FIFO method
A process costing method in which equivalent units and unit costs relate only to work done during the current period. (p. 148)
Operation costing
A hybrid costing system used when products have some common characteristics and some individual characteristics. (p. 152)
Processing department
An organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product. (p. 143)
Weighted-average method
A process costing method that blends together units and costs from both the current and prior periods. (p. 148)
Break-even point
The level of sales at which profit is zero. (p. 186)
Contribution margin ratio (CM ratio)
A ratio computed by dividing contribution margin by dollar sales. (p. 191)
Cost-volume-profit (CVP) graph
A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand. (p. 188)
Degree of operating leverage
A measure, at a given level of sales, of how a percentage change in sales will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income. (p. 202)
Incremental analysis
An analytical approach that focuses only on those costs and revenues that change as a result of a decision. (p. 193)
Margin of safety
The excess of budgeted or actual dollar sales over the break-even dollar sales. (p. 199)
Operating leverage
A measure of how sensitive net operating income is to a given percentage change in dollar sales. (p. 202)
Sales mix
The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales. (p. 205)
Target profit analysis
Estimating what sales volume is needed to achieve a specific target profit. (p. 196)
Variable expense ratio
A ratio computed by dividing variable expenses by dollar sales (p. 192)
Absorption costing
A costing method that includes all manufacturing costs�direct materials, direct labor, and both variable and fixed manufacturing overhead�in unit product costs. (p. 230)
Common fixed cost
A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments. (p. 240)
Segment
Any part or activity of an organization about which managers seek cost, revenue, or profit data. (p. 230)
Segment margin
A segment's contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs. (p. 241)
Traceable fixed cost
A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated. (p. 240)
Variable costing
A costing method that includes only variable manufacturing costs�direct materials, direct labor, and variable manufacturing overhead�in unit product costs. (p. 230)
Action analysis report
A report showing what costs have been assigned to a cost object, such as a product or customer, and how difficult it would be to adjust the cost if there is a change in activity. (p. 295)
Activity
Activity An event that causes the consumption of overhead resources in an organization. (p. 275)
Activity-based costing (ABC)
A costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs. (p. 273)
Activity-based management (ABM)
A management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects. (p. 296)
Activity cost pool
A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system. (p. 275)
Activity measure
An allocation base in an activity-based costing system; ideally, a measure of the amount of activity that drives the costs in an activity cost pool. (p. 275)
Batch-level activities
Activities that are performed each time a batch of goods is handled or processed, regardless of how many units are in the batch. The amount of resource consumed depends on the number of batches run rather than on the number of units in the batch. (p. 275)
Benchmarking
A systematic approach to identifying the activities with the greatest potential for improvement. (p. 296)
Customer-level activities
Activities that are carried out to support customers, but that are not related to any specific product. (p. 276)
Duration driver
A measure of the amount of time required to perform an activity. (p. 275)
First-stage allocation
The process by which overhead costs are assigned to activity cost pools in an activity-based costing system. (p. 281)
Organization-sustaining activities
Activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. (p. 276)
Product-level activities
Activities that relate to specific products that must be carried out regardless of how many units are produced and sold or batches run. (p. 276)
Second-stage allocation
The process by which activity rates are used to apply costs to products and customers in activity-based costing. (p. 285)
Transaction driver
A simple count of the number of times an activity occurs. (p. 275)
Unit-level activities
Activities that are performed each time a unit is produced. (p. 275)
Anaconda Mining Company shipped 9,000 tons of copper concentrate for $450,000 in March and 11,000 tons for $549,000 in April. Shipping costs for 12,000 tons to be shipped in May would be expected to be:
Variable shipping cost per ton = Change in cost � Change in activity
= ($549,000 - $450,000) � (11,000 tons - 9,000 tons)
= $99,000 � 2,000 tons
= $49.50 per ton
Fixed cost element of shipping cost = Total cost - Total variable cost
= $549,000 - ($49.50 p
Ease of adjustment codes
Costs are coded as Green, Yellow, or Red�depending on how easily the cost could be adjusted to changes in activity. "Green" costs adjust automatically to changes in activity. "Yellow" costs could be adjusted in response to changes in activity, but such ad