Chapter 3-8 (Managerial Accountancy)

Absorption costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs. (p. 98)

Allocation base

A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects. (p. 98)

Cost of goods manufactured

The manufacturing costs associated with units of product that were finished during the period. (p. 99)

Finished goods

Units of product that have been completed but not yet sold to customers. (p. 98)

Job cost sheet

A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job. (p. 98)

Job-order costing

A costing system used in situations where many different products, jobs, or services are produced each period. (p. 98)

Normal costing

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job. (p. 98)

Overapplied overhead

A credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually incurred during a period. (p. 111)

Overhead application

The process of assigning overhead cost to specific jobs. (p. 98)

Predetermined overhead rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period. (p. 98) 

Raw materials

Any materials that go into the final product. (p. 98)

Schedule of cost of goods manufactured

A schedule that contains three elements of product costs— direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods. (p. 108)

Schedule of cost of goods sold

A schedule that contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold. (p. 109)

Underapplied overhead

A debit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period. (p. 111)

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. 98)

Break-even point

The level of sales at which profit is zero. (p. 220)

Contribution margin ratio (CM ratio)

A ratio computed by dividing contribution margin by sales.(p. 226)

Cost-volume-profit (CVP) graph

A graphical representation of the relationships between an organization’s revenues, costs, and profits on the one hand and its sales volume on the other hand. (p. 223)

Degree of operating leverage

A measure, at a given level of sales, of how a percentage change in sales will affect profits.

Incremental analysis

An analytical approach that focuses only on those costs and revenues that change as a result of a decision. (p. 229)

Margin of safety

The excess of budgeted or actual dollar sales over the break-even dollar sales. (p. 235)

Operating leverage

A measure of how sensitive net operating income is to a given percentage change in dollar sales. (p. 239)

Sales mix

The relative proportions in which a company’s products are sold.

Target profit analysis

Estimating what sales volume is needed to achieve a specific target profit. (p. 234)

Variable expense ratio

A ratio computed by dividing variable expenses by sales.

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. (p 260)

Dependent variable

A variable that responds to some causal factor; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX. (p 261)

Engineering approach

A detailed analysis of cost behavior based on an industrial engineer’s evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs. (p 260)

High-low method

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels. (p 261)

Independent variable

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. (p 261)

Least-squares regression method

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. (p 262)

Linear cost behavior

Cost behavior is said to be linear whenever a straight line is a reasonable 2 approximation for the relation between cost and activity. (p 261)

Absorption costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs. (p. 282)

Common fixed cost

A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments. (p. 295)

Segment

Any part or activity of an organization about which managers seek cost, revenue, or profit data. (p. 282)

Segment margin

A segment’s contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs. (p. 295)

Traceable fixed cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated. (p. 294)

Variable costing

A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs. (p. 282)

Budget

A detailed plan for the future that is usually expressed in formal quantitative terms. (p. 334) 

Cash budget

A detailed plan showing how cash resources will be acquired and used over a specific time period. (p. 338)

Continuous budget

A 12-month budget that rolls forward one month as the current month is completed. (p. 335)

Control

The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change. (p. 334)

Direct labor budget

A detailed plan that shows the direct labor-hours required to fulfill the production budget. (p. 349)

Direct materials budget

A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. (p. 347)

Ending finished goods inventory budget

A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet. (p. 351)

Manufacturing overhead budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period. (p. 350)

Master budget

A number of separate but interdependent budgets that formally lay out the company’s sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet. (p. 337)

Merchandise purchases budget

A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period. (p. 346)

Participative budget

See Self-imposed budget. (p. 335)

Perpetual budget

 See Continuous budget. (p. 335)

Planning

The process of establishing goals and specifying how to achieve them. (p. 334)

Production budget

A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs. (p. 345)

Responsibility accounting

A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which they can exert significant control. The managers are held responsible for differences between budgeted and actual results. (p. 335)

Sales budget

A detailed schedule showing expected sales expressed in both dollars and units. (p. 338) 

Self-imposed budget

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement. (p. 335)

Selling and administrative expense budget

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period. (p. 351)