• Activity base A measure of whatever causes the incurrence of a variable cost. For example, the total cost of surgical gloves in a hospital will increase as the number of surgeries increases. Therefore, the number of surgeries is the activity base that explains the total cost of surgical gloves. (p. 29)
• Administrative costs All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling. (p. 27)
• Committed fixed costs Investments in facilities, equipment, and basic organizational structure that cant 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 be no flight and no passengers. But no part of the pilots wage is caused by any one passenger taking the flight. (p. 25)
• 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. 38)
• Contribution margin The amount remaining from sales revenues after all variable expenses have been deducted. (p. 38)
• Conversion cost Direct labor cost plus manufacturing overhead cost. (p. 26)
• 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, geographic regions, and parts of the organization such as departments or divisions. (p. 24)
• Cost structure The relative proportion of fixed, variable, and mixed costs in an organization. (p. 29)
• Differential cost A future cost that differs between any two alternatives. (p. 35)
• Differential revenue Future revenue that differs between any two alternatives. (p. 35)
• Direct cost A cost that can be easily and conveniently traced to a specified cost object. (p. 24)
• Direct labor Factory labor costs that can be easily traced to individual units of product. Also called touch labor. (p. 26)
• 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)
• Financial accounting The phase of accounting that is concerned with reporting historical financial information to external parties, such as stockholders, creditors, and regulators. (p. 24)
• 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)
• Finished goods Units of product that have been completed but not yet sold to customers. (p. 27)
• Incremental cost An increase in cost between two alternatives. (p. 35)
• Indirect cost A cost that cannot be easily and conveniently traced to a specified cost object. (p. 25)
• Indirect labor The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. (p. 26)
• 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. 26)
• Inventoriable costs Synonym for product costs. (p. 27)
• Managerial accounting The phase of accounting that is concerned with providing information to managers for use within the organization. (p. 24)
• 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. 36)
• Period costs Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. (p. 28)
• Prime cost Direct materials cost plus direct labor cost. (p. 26)
• 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. 31)
• 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. 36)
• 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)
• 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. 27)

Questions

11 What are the three major types of product costs in a manufacturing company?

12 Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect labor, and (e) manufacturing overhead.

13 Explain the difference between a product cost and a period cost.

14 Distinguish between (a) a variable cost, (b) a fixed cost, and (c) a mixed cost.

15 What effect does an increase in the activity level have on a. Unit fixed costs? b. Unit variable costs? c. Total fixed costs? d. Total variable costs?

16 Define the following terms: (a) cost behavior and (b) relevant range.

17 What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.

18 Managers often assume a strictly linear relationship between cost and the level of activity. Under what conditions would this be a valid or invalid assumption?

19 Distinguish between discretionary fixed costs and committed fixed costs.

110 Does the concept of the relevant range apply to fixed costs? Explain.

111 What is the difference between a traditional format income statement and a contribution format income statement?

112 What is the contribution margin?

113 Define the following terms: differential cost, sunk cost, and opportunity cost.

114 Only variable costs can be differential costs. Do you agree? Explain.