Please fill in the blanks:

• For preparing financial statements
  • ___Product costs_________
    • Include all the costs that are involved in acquiring or making a product.
      • These costs are expensed in the income statement ______________Costs of goods sold_COG___________.
  • ___Period costs___________
    • Include all selling and administrative costs.
      • These costs are expensed in the income statement ______________Selling and Administrative costs_____________.
• For predicting cost behavior
  • Cost behavior refers to how a cost will react to changes in the level of activity.
    • _______Variable Costs____________ - a cost that varies, in total, in direct proportion to changes in the level of activity.
      • Variable cost per unit is _____Constant______________.
      • An __activity base________ is a measure of what causes the incurrence of variable costs.
    • ______Fixed______________ - a cost that remains constant, in total, regardless of changes in the level of activity.
      • If expressed on a per unit basis, the average fixed cost per unit varies _____________ with changes in activity.
      • _______________________________ represent investments with a multi-year planning horizon that cannot be easily adjusted in the short term.
      • _______________________________ usually arise from annual decisions by management and they can be easily reduced in the short term.
    • The linearity assumption and the relevant range
      • Accountants usually assume that costs are ______________________.
      • Nonetheless, within a narrow band of activity, a curvilinear cost can be satisfactorily approximated by a straight line.
        • The ________________________ is that range of activity within which the assumptions made about cost behavior are valid.
    • ______Mixed costs____________ - a cost that contains both variable and fixed elements.
      • The following equation can be used to express the relationship between mixed costs and the level of the activity and calculate the total mixed cost for any level of activity:

where:

= the variable cost per unit;

= the level of activity (such as number of units);

= total fixed costs; and

= total cost

• For decision making
  • It is important to realize that every decision involves a choice between at least two alternatives.
  • The goal of making decisions is to identify those costs that are ____________________ __________________________ to the decision.
  • To make decisions, it is essential to have a grasp on three concepts:
    • ___Differential cost_______________ - a difference in cost between any two alternatives
      • These costs can be either fixed or variable.
    • ___Oppritunity cost____________ - the potential benefit that is given up when one alternative is selected over another.
      • These costs are not usually entered into the accounting records of an organization but must be explicitly considered in all decisions.
    • ____Sunk Cost_______________ - a cost that has already been incurred and that cannot be changed now or in the future.

Traditional and contribution format income statement

• The traditional and contribution formats differ as follows:
  • The traditional approach separated ______________________ as required for external reporting purposes from __________________________________________________.
  • The contribution approach separates costs into ________________________________.
    • The contribution approach is used as an internal planning and decision-making tool.

Traditional Income Statement Contribution Format Income Statement