Cost Concepts, Terms and Measurement

Flashcards on Cost Concepts, Terms, and Measurement

Direct Materials

Raw materials that can be physically and directly associated with the finished product during the manufacturing process.

Indirect Materials

Materials that do not physically become part of the finished product or cannot be traced due to their small cost.

Direct Labor

The work of factory employees that can be physically and directly associated with converting raw materials into finished goods.

Indirect Labor

Labor with no physical association with the finished product, or where tracing costs is impractical.

Manufacturing Overhead

Costs that are indirectly associated with the manufacture of the finished product, including indirect materials, indirect labor, depreciation, insurance, taxes, and maintenance.

Finished Goods Inventory

Shows the cost of completed goods on hand.

Work in Process Inventory

Shows the cost applicable to units that have been started into production but are only partially completed.

Raw Materials Inventory

Shows the cost of raw materials on hand.

Cost

The monetary amount of the resources given up or sacrificed to attain some objective.

Cost Behavior

Describes how a cost behaves or changes as the amount of cost driver changes.

Cost Pool

An account in which similar costs are accumulated prior to allocation to cost objects.

Cost Object

The intermediate and final disposition of cost pools (e.g., product, job, process).

Cost Driver

A factor that causes a change in the cost pool for a particular activity; a basis for cost allocation.

Activity

Any event, action, transaction, or work sequence that incurs costs when producing a product or providing a service.

Cost Behavior Analysis

The study of how specific costs respond to changes in the level of business activity.

Activity Index

Identifies the activity that causes changes in the behavior of costs.

Variable Costs

Costs that vary in total directly and proportionately with changes in the activity level but remain the same per unit.

Fixed Costs

Costs that remain the same in total regardless of changes in the activity level, but vary per unit inversely with activity.

Mixed Costs

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

Relevant Range

The range of activity over which a company expects to operate during the year, where cost behavior is assumed to be linear.

High-Low Method

A method where the fixed and variable elements of mixed costs are computed from two data points: the high and low periods as to activity level or cost driver.

Scattergraph Method

A method where various costs are plotted on a vertical line and measurement figures are plotted on a horizontal line to compute variability and fixed cost.

Least Squares (Regression Analysis) Method

A statistical technique that investigates the association between dependent and independent variables to determine the line of best fit.

Correlation Analysis

Used to measure the strength of linear relationship between two or more variables.

Coefficient of Correlation (r)

Measures the relative strength of linear relationship between two variables, ranging from -1.0 to +1.0.

Coefficient of Determination (r2)

The proportion of the total variation in Y that is accounted for by the regression equation.