ACCOUNTING EXAM 2

Cost behavior

Cost behavior refers to how a cost reacts to changes in the level of activity.

Common classifications of costs

Fixed, Mixed, and Variable costs.

Total fixed cost behavior

Total fixed cost remains constant when volume changes.

Total variable cost behavior

Total variable cost increases as volume increases, and decreases as volume decreases.

Fixed cost per unit behavior

Fixed cost per unit decreases as volume increases.

Mixed cost

Mixed cost contains both fixed and variable components.

Formula for mixed costs

Total cost = FC + (VC * # of units), or Y = a + bX.

Relevant range

The relevant range is the range of activity over which fixed and variable costs remain valid.

Contribution margin (CM)

CM is the amount remaining from sales revenue after variable costs have been subtracted. CM=Sales−Variable Costs.

Break-even point in units

Break-even units = Fixed Expenses / Unit CM.

Break-even sales in dollars

Break-even sales = Number of units * Sales price per unit.

Cost accumulation

Cost accumulation is the process of determining the cost of a cost object by accumulating costs related to it.

Cost object

A cost object is anything for which costs are determined, such as products, services, or departments.

Direct vs. indirect costs

Direct costs can be easily traced to a cost object, while indirect costs cannot.

Cost driver

A cost driver is any factor that causes or drives an activity's cost (e.g., labor hours drive labor costs).

Allocation rate for cost allocation

Allocation rate = Total cost to be allocated / Total cost driver.

Cost pools

Cost pools accumulate many indirect costs, which are then allocated to cost objects.

Cost drivers for variable overhead

Volume-based measures, such as labor hours or machine hours.

Objective of allocating fixed overhead

The objective is to distribute a rational share of the fixed overhead costs to each product.

Primary characteristics of relevant information

It differs among alternatives and is future-oriented.

Sunk costs

Sunk costs are historical costs that cannot be changed and are not relevant for current decisions.

Opportunity costs

Opportunity costs are the sacrifices incurred when choosing one alternative over another.

Cost hierarchy

It classifies costs based on their relationship to production levels: Unit Level: Costs incurred per unit of product. Batch Level: Costs incurred for a batch of products. Product Level: Costs incurred to support specific products. Facility Level: Costs incurred to support the entire company.

Avoidable costs

Avoidable costs are costs that can be eliminated by making a specific decision.

Decision-making process for special orders

1. Determine relevant revenue for the special order. 2. Determine relevant costs for the special order. 3. Accept the special order if relevant revenue exceeds relevant costs.

Qualitative characteristics in special order decisions

Consider if regular customers demand reduced prices, and if the special order could reduce capacity to satisfy full-price customers.