Relevant Cost for Decision Making and Transfer Pricing

A set of vocabulary flashcards covering key concepts related to relevant costs for decision making and transfer pricing in management accounting.

Relevant Cost

Costs that are future costs which will differ among the alternatives being considered.

Fixed Costs

Costs that remain constant regardless of the level of activity.

Variable Costs

Costs that change proportionately with the level of activity.

Incremental Cost

The change in total cost caused by a change in the level of activity.

Opportunity Cost

The value of the best alternative action that must be forgone as a result of making a decision.

Sunk Cost

Costs that have already been incurred and cannot be recovered, thus irrelevant for future decisions.

Semi-Fixed Cost

Fixed costs that remain fixed over a moderate period but can change to new levels with changes in activity.

Semi-Variable Cost

Costs that have both fixed and variable components and increase in a linear fashion with activity.

Discretionary Cost

Fixed costs that are not necessary for maintaining production capacity, but set as fixed amounts.

Committed Cost

Costs that are necessary to maintain current levels of activity due to strategic planning.

Transfer Pricing

A method used in decentralized organizations for pricing transactions between divisions.

Make or Buy Decision

An analysis to determine whether to manufacture a product internally or purchase it from an external supplier.

Contribution Margin

The sales revenue minus variable costs, showing the portion of sales that contributes to fixed costs and profit.

Capacity Cost

Costs associated with maintaining the physical capacity to produce goods.

Cost Driver

An element that causes a change in cost, such as production volume.

Total Cost

The sum of all costs incurred in producing a product, including both fixed and variable costs.

Strategic Costing

The process of using cost information for strategic decisions such as pricing and capacity planning.

ABCs (Activity-Based Costing)

A costing method that assigns overhead and indirect costs to specific products or services based on their activities.

Variable Profit

The profit derived from sales after variable costs have been deducted.

Lost Contribution Margin

The contribution margin that is lost when a product is discontinued and resources are reallocated.

Incremental Profit

The additional profit earned from a special order or additional activity.

Transfer Pricing Tax Minimization

The strategy employed by multinational companies to shift profits to lower-tax countries through transfer pricing.