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Flashcards in Chapter 2 Deck (24):

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.


Direct Cost

A cost that can be easily and conveniently traced to a specified cost object. Ex. Direct material and direct labor.


Indirect Costs

A cost that cannot be easily and conveniently traced to a specified cost object. Ex. Manufacturing overhead.


Common Costs

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. Ex. CEO Salary.


Direct Materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it. Ex. Car Parts like installing a radio or windshield.


Direct Labor

Factory labor costs that can be easily traced to individual units of a product. Also called touch labor. Example Wages paid to assembly workers.


Manufacturing Overhead

All manufacturing costs that cannot be easily traced directly to specific units produced. Examples are indirect materials and indirect labor.


Indirect Materials

Materials used to support the production process like lubricants and cleaning supplies used in the assembly plant.


Indirect Labor

The costs of wages paid to employees who are not directly involved in production work. Examples are maintenance workers, janitors, and security guards.


Non-manufacturing costs

Selling Costs- costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs.
Administrative Costs- All executive, organizational, and clerical costs. Can be either direct or indirect costs.


Period Costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. All selling and administrative costs are period costs. Examples include sales commissions, advertising, executive salaries, PR, rental costs of admin offices.
Period Cost= Selling Expenses + Administrative Expenses


Cost Object

Is anything for which cost data are desired-- including products, customers, jobs, and organizational subunits.


Raw Materials

The materials that go into the final product.


Selling Costs

Include all costs that are incurred to secure customer orders and get the finished product to the customer. Examples: advertising, shipping, sales travel, commissions, sales salaries, and costs of finished goods warehouses.


Administrative Costs

Include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples include executive compensation, general accounting, secretarial, public relations.


Product Costs

Include all costs involved in acquiring or making a product. In the case of manufactured goods, the costs of direct material, direct labor, and manufacturing overhead.
Product Cost= Direct Materials + Direct Labor + Manufacturing Overhead


Prime Cost

The sum of direct materials cost and direct labor cost.
Prime Cost= Direct materials + Direct Labor


Conversion Cost

The sum of direct labor cost and manufacturing overhead
Conversion Cost=Direct Labor + Manufacturing overhead


Variable Cost

Varies, in total, in direct proportion to chance in the level of activity. Common Examples, cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of MFOH such as indirect materials, supplies, and power, and variable elements of selling and admin expenses such as commissions and shipping costs.


Fixed Cost

Is a cost that remains constant, in total, regardless of changes in the level of activity. Examples include straight-line depreciations, insurance, property taxes, rent, supervisory salaries, admin salaries, and advertising.


Committed fixed costs

Represent organizational investments with multi year planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes.


Discretionary Fixed Cost (managerial fixed costs)

Usually arise from annual decisions by management to spend on certain fixed cost items.


Relevant Range

The range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.


Mixed Cost

Contains both variable and fixed cost elements.