remain constant per unit and vary in total.

Variable Costs

True or False: Period costs are expensed when incurred. True

True or False: Period costs do not flow through inventory accounts. True.

True or False: Differential costs are also known as incremental costs. True.

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

A cost that changes in direct proportion to changes in the activity level is a _______ _______.
variable cost

Opportunity Costs Benefits that are given up when selecting one alternative over another, and
should be considered in decision making.

Product costs flow through the inventory accounts until the goods are sold, at which time they
are matched against sales on the _______ _______. income statement.

Mixed Costs Costs that contain both a variable and a fixed cost elements and change in total
but not proportionately with changes in the activity level.

Nonmanufacturing costs costs that include selling and administrative costs (such as sales
commissions or a company president's salary)

Because the variable cost per unit equals the slope of the straight line, the steeper the slope, the
_______ the variable cost per unit. higher

Marginal Revenue The revenue obtained from selling on additional unit of product.

Manufacturing costs include: direct materials, direct labor, manufacturing overhead

Direct Cost a cost that can be easily and conveniently traced to a specified cost object

Indirect Cost a cost that cannot be easily and conveniently traced to a specified cost object

Direct Materials Materials that become an important component of the finished product
whose cost can be easily and conveniently traced to the finished product.

Fixed Costs examples: Factory Rent

Administrative salaries
Factory Insurance

Sunk Costs - costs that have already been incurred and cannot be recovered.
- Never relevant and should be disregarded when making decisions.
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.

Touch Labor Also known as Direct Labor

Manufacturing overhead includes all manufacturing costs except direct materials and direct
labor (indirect materials and indirect labor are examples)

Within the relevant range of activity, fixed costs: remain constant in total, and the average per
unit decreases with more activity, and increases with less activity.

Cost Objects include - customers

- organizational subunits
- anything for which cost data is desired

Cost Behavior the way in which a cost reacts to changes in the level of activity

discretionary fixed costs Fixed costs that can be changed relatively easily at management
discretion without significant damage to a company's long-term goals.

Committed fixed costs represent organizational investments with a multiyear planning

horizon that can't be significantly reduced even for short periods of time without making
fundamental changes

Contribution Approach to Income Statement 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.
- Aids in decision making.

Contribution Margin - The amount remaining from sales revenues after all variable expenses
have been deducted.
- This amount contributes to covering fixed expenses and profits for the period.

Indirect Labor Costs Labor costs that cannot be physically traced to production of a product or
service; included as part of overhead. (Factory security guards wages, assembly-line supervisor's
salary)

Within the relevant range of activity, variable costs: Total variable cost increases and decreases
in proportion to changes in activity level; Per unit costs remain constant

Straight-line Equation for Mixed Costs Y = a + bX

Y = Total Mixed Cost
a = Total Fixed Cost
b = Variable cost per unit of activity
X = Level of Activity
Cost of Goods Sold beginning inventory + purchases - ending inventory

Product Cost direct materials + direct labor + manufacturing overhead

Period Cost selling expenses + administrative expenses

Conversion Cost Direct Labor + Manufacturing Overhead

The direct labor and overhead costs incurred to change raw materials into finished products.

Prime Cost Direct Materials + Direct Labor

Variable Manufacturing Cost direct materials + direct labor + variable manufacturing overhead

Total Fixed Cost fixed manufacturing overhead + fixed selling expense + fixed
administrative expense

Common Activity Bases include: - Machine Hours

- Units Sold
- Direct Labor Hours

Raw Materials any materials that go into the final product

Common Cost a type of indirect cost that is incurred to support a number of cost objects but
cannot be traced to them individually

Differences between traditional and contribution format income statements: - Traditional

income statements focus on cost classifications. Product and Period costs.
- Contribution format statements focus on cost behavior. Distinction between fixed and variable
costs.
- Compared to traditional statements, contribution format statements provide management with a
tool to make decision making easier.

Prior to being recorded on the income statement, manufacturers' product costs flow through:
- Work in Process
- Raw Materials
- Finished Goods

Step-variable costs - tend to be fixed over a fairly narrow range of activity and rise in multiple
steps across the relevant range.
- can be adjusted quickly as conditions change.
- may include total salaried employee expense.

Cost Structure the relative proportion of fixed, variable, and mixed costs in an organization
As the level of activity moves outside of the relevant range, _______ _______ increase or
decrease in discrete steps rather than a linear fashion. fixed costs

Factory burden is a synonym for Manufacturing Overhead

Differential costs, opportunity costs, and sunk costs are all cost classifications used in _______
_______. Decision making.

True or False: Presenting fixed costs on an average per unit basis makes them look like they are
variable costs. True.

Period costs are always expensed on the income statement in the period in which ___________.
they are incurred. (Matching principle)

Differential cost A future cost that differs between any two alternatives. Also known as
incremental cost.

Manufacturing costs direct materials, direct labor, manufacturing overhead

Product Costs - "attach" to units of product as they are purchased for resale or produced.
- are also called inventoriable costs.
-Direct Materials + Direct Labor + Manufacturing Overhead

Five Purposes of Cost Classifications- Assigning costs to cost objects.

- Accounting for costs in manufacturing companies.
- Preparing financial statements.
- Predicting cost behavior in response to changes in activity.
- Making decisions.

Traditional Income StatementSales Revenue

- Cost of Goods Sold
= Gross Margin
- Selling & General and Administrative Expenses
= Net Income from Operations

Contribution Income Statement Sales Revenue

- Variable Costs (CoGS, Var Selling, Var Admin)
= Contribution Margin
- Fixed Costs (Fixed Selling & Admin)
= Net Income