Accounting 102 Unit 2 Exam

break-even point

level of activity where revenues equal total expenses, producing a zero net income; also the point where the contribution margin is said to cover fixed costs

committed fixed cost

Costs that arise from an organization's commitment to engage in operations; unavoidable elements like depreciation, rent, insurance, property taxes

contribution margin

Revenues minus all variable expenses, whether related to production or selling and administration (not to be confused with gross profit)

cost-volume-profit analysis (CVP)

Analysis focusing on the interplay of pricing, volume, variable and fixed costs, and product mix

discretionary fixed cost

Fixed cost resulting from yearly spending decisions; proper planning can result in avoidance of these costs as necessary (e.g., advertising and training)

economies of scale

Efficiencies associated with increases in volume

fixed cost

total cost that is the same regardless of volume; total cost is constant and per unit cost decreases with volume increases

high-low method

simple means for separating costs into fixed and variable components, based upon the difference between costs at the highest and lowest observed levels of activity

mixed costs

cost that have both fixed and variable components

relevant range

 level of activity for which assumptions underlying CVP are expected to hold true

scattergraph

simplistic mapping of observed data points, where a line is "visually" drawn to represent the estimated cost function

step cost

cost function that is fixed over a range and then increases by a measured step to a new level at the next high increment of activity

target income

level of income that is to be obtained; CVP projects activity levels necessary to achieve this benchmark

variable cost

per unit cost that is the same regardless of volume; total variable cost increases with volume increases

method of least squares

complex means for separating costs into fixed and variable components, based upon minimizing the variances between all observations and the resulting assumed cost function

activity-based costing

Alternative costing method for strategic management; divides production into activities, defines costs for activities, and allocates costs to objects based on activity consumption

activity

event that gives rise to the consumption of resources

activity driver

Event that causes consumption of an activity

Batch-Level Activity 

Activities that relate to each batch of production; independent of the number of units within that batch

customer-level activity

 Activities that relate to each customer; independent of the volume of goods and services provided to the specific customer

entity-sustaining activity

 Activities that relate to an entity's ability to operate; independent of business volume

equivalent units

measure of physical units expressed in terms of finished units

process costing

method to allocate the total costs of production to homogenous units produced via a continuous process that usually involves multiple steps or departments

unit-level activity

Activities that relate to the number of units of output; each additional unit of production requires another activity

bottom-up participative budget

 budget approach driven by the direct participation of lower-level employees

budget slack

influence of behavior to "pad" a budget via misstating expected revenues and/or expenses; to create more favorable budget vs. actual performance appraisals

cash budget

essential budget component detailing planned cash receipts, disbursements, and financing actions

continuous budget

budget that is constantly updated; as one month/quarter is completed another is added to the set the projections

flexible budget

budget that covers a range of potential outcomes by relating expense levels to the potential revenues

incremental budgeting

budgeting approach where the prior year experience sets a base line for a new budget; changes are made based on new information but the base need not be rejustified in detail

master budget

Also known as the comprehensive budget; an integrated set of articulated budgets relating to numerous operational subcomponents (labor, material, overhead, SG&A, etc.)

sales budget

budget that details anticipated revenue levels

static budget

budget that does not anticipate alternative outcomes; estimated sales and expenses are fixed and establish the relevant benchmarks

zero-based budgeting

budget approach where each expenditure item must be justified for each new budget period