Managerial Accounting - Chapters 5-7

Front 1

Activity base

Back 1

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 an activity base for explaining the total cost of X-ray film.

Front 2

Committed fixed cost

Back 2

Those fixed costs that are difficult to adjust and that relate to the investment in facilities, equipment, and the basic organizational structure of a firm.

Front 3

Contribution approach

Back 3

An income statement format that is geared to cost behavior in that costs are separated into variable and fixed categories rather than being separated according to the functions of production, sales, and administration.

Front 4

Cost formula

Back 4

A formula relating cost to activity. This expression is generally in the form of th linear equation Y = a + bX, where Y is the total cost, a is the total fixed cost, b is the variable cost rate, and X is the activity.

Front 5

Cost structure

Back 5

The relative proportion of fixed, variable, and mixed costs found within an organization.

Front 6

Curvilinear costs

Back 6

The relative proportion of fixed, variable, and mixed costs found within an organization.

Front 7

Dependent variable

Back 7

A variable that reacts or responds to some causal factor; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX.

Front 8

Discretionary fixed costs

Back 8

Those fixed costs that arise from annual decisions by management to spend in certain fixed cost areas, such as advertising and research.

Front 9

High low method

Back 9

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low levels of activity.

Front 10

Independent variable

Back 10

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.

Front 11

Least-squares regression method

Back 11

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.

Front 12

Mixed cost

Back 12

A cost that contains both variable and fixed cost elements. Also see Semi-variable cost.

Front 13

Curvilinear costs

Back 13

The relative proportion of fixed, variable, and mixed costs found within an organization.

Front 14

Multiple regression

Back 14

An analytical method required in those situations where variations in a dependent variable are caused by more than one factor.

Front 15

Regression line

Back 15

A line fitted to an array of plotted points. The slope of the line, denoted by the letter b in the linear equation Y = a + bX, represents the average variable cost per unit of activity. The point where the line intersects the cost axis, denoted by the letter a in the above equation, represents the average total fixed cost.

Front 16

Relevant range

Back 16

The range of activity within which assumptions relative to variable and fixed cost behavior are valid.

Front 17

Scattergraph method

Back 17

A method of separating a mixed cost into its fixed and variable elements, Under this method, a regression line is fitted to an array of plotted points by simple, visual inspection.

Front 18

Semi-variable cost

Back 18

A cost that contains both variable and fixed cost elements. Also see Mixed cost.

Front 19

Step-variable cost

Back 19

A cost (such as the cost of a maintenance worker) that is obtainable only in large pieces and that increases and decreases only in response to fairly wide changes in the activity level.

Front 20

Traditional approach

Back 20

An income statement format in which costs are organized and presented according to the functions of production, administration, and sales.

Front 21

Relevant range

Back 21

The range of activity within which assumptions relative to variable and fixed cost behavior are valid.

Front 22

Scattergraph method

Back 22

A method of separating a mixed cost into its fixed and variable elements, Under this method, a regression line is fitted to an array of plotted points by simple, visual inspection.

Front 23

Semi-variable cost

Back 23

A cost that contains both variable and fixed cost elements. Also see Mixed cost.

Front 24

Step-variable cost

Back 24

A cost (such as the cost of a maintenance worker) that is obtainable only in large pieces and that increases and decreases only in response to fairly wide changes in the activity level.

Front 25

Traditional approach

Back 25

An income statement format in which costs are organized and presented according to the functions of production, administration, and sales.

Front 26

Break-even point

Back 26

The level of activity at which an organization neither earns a profit nor incurs a loss. The break-even point can also be defined as the point where total revenue equals total costs and as the point where total contribution margin equals total fixed costs.

Front 27

Contribution margin method

Back 27

A method of computing the break-even point in which the fixed costs are divided by the contribution margin per unit.

Front 28

Contribution margin ration (CM ration)

Back 28

The contribution margin as a percentage of total sales.

Front 29

Cost-volume-profit (CVP) graph

Back 29

The relationship between revenues, costs, and level of activity in an organization presented in graphic form.

Front 30

Degree of operating leverage

Back 30

A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net income.

Front 31

Equation method

Back 31

A method of computing the break-even point that relies on the equation Sales = Variable expenses + Profits.

Front 32

Incremental analysis

Back 32

An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision in an organization.

Front 33

Margin of safety

Back 33

The excess of budgeted (or actual) sales over the break-even volume of sales.

Front 34

Operating leverage

Back 34

A measure of the extent to which fixed costs are being use in an organization. The greater the fixed costs, the greater is the operating leverage available and the greater is the sensitivity of net income to changes in sales.

Front 35

Profitgraph

Back 35

An alternative form of the CVP graph that focuses more directly on how profits change with changes in volume.

Front 36

Sales mix

Back 36

The relative combination 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

Front 37

Absorption costing

Back 37

A costing method that includes all manufacturing costs – direct materials, direct labor, and both variable and fixed manufacturing overhead – in the cost of a unit of product. Absorption costing is also referred to as the full cost method.

Front 38

Direct costing

Back 38

Another term for variable cost.

Front 39

Fixed manufacturing overhead cost deferred in inventory

Back 39

The portion of the fixed manufacturing overhead cost of a period that goes into inventory under the absorption costing method as a result of production exceeding sales.

Front 40

Fixed manufacturing overhead cost released from inventory

Back 40

The portion of the fixed manufacturing overhead cost of a prior period that becomes an expense of the current period under the absorption costing method as a result of sales exceeding production.

Front 41

Full cost

Back 41

See absorption costing.

Front 42

Marginal costing

Back 42

Another term for variable costing.

Front 43

Normalized overhead rate

Back 43

A rate based on the average activity of many periods – past and present – rather than based only on the expected activity of the current period.

Front 44

Variable costing

Back 44

A costing method that includes only variable manufacturing costs – direct materials, direct labor, and variable manufacturing overhead – in the cost of a unit of product.