Chapter 1 & 5A: Managerial Accounting & Cost Concepts

Vocabulary practice flashcards covering fundamental terms, definitions, and cost classifications in managerial accounting.

Financial Accounting

Accounting aimed at external users that emphasizes past performance, follows G.A.A.P., reports on the company as a whole, and has mandatory reporting requirements.

Managerial Accounting

Accounting designed for internal users that focuses on the future, does not follow G.A.A.P., reports on segments of the company, and does not have mandatory reporting requirements.

Direct Cost

A cost that can be easily and conveniently traced to a specific product or cost object, such as direct materials or direct labor.

Indirect Cost

A cost that cannot be easily or conveniently traced to a specific product or cost object, such as manufacturing overhead.

Product Costs (Manufacturing Costs)

Costs incurred to manufacture a product, consisting of direct materials, direct labor, and manufacturing overhead; reported as inventory on the balance sheet until sold.

Period Costs (Non-Manufacturing Costs)

Selling and administrative expenses that are reported as expenses on the income statement in the period in which they are incurred.

Direct Labor

Labor costs that can be easily traced to individual units of product, such as wages for assembly line workers.

Direct Materials

Raw materials that become an integral part of the finished product and can be easily traced to it, such as tires on an automobile or paper in a textbook.

Manufacturing Overhead

All manufacturing costs other than direct materials and direct labor, including indirect materials, indirect labor, and factory-related operating expenses.

Prime Cost

The sum of direct materials and direct labor ($\text{Prime Cost} = \text{Direct Materials} + \text{Direct Labor}$).

Conversion Cost

The sum of direct labor and manufacturing overhead ($\text{Conversion Cost} = \text{Direct Labor} + \text{Manufacturing Overhead}$).

Selling Costs

Costs necessary to secure customer orders and deliver the finished product, such as sales commissions and shipping expenses.

Administrative Costs

Executive, organizational, and clerical costs associated with the overall management of an organization, such as CEO salary and corporate headquarters utilities.

Variable Cost

A cost that remains constant per unit but varies in total in direct proportion to changes in the activity level.

Fixed Cost

A cost that remains constant in total within the relevant range regardless of changes in activity level, but decreases per unit as activity level rises.

Committed Fixed Costs

Long-term fixed costs that cannot be significantly reduced in the short term without impairing basic operations, such as insurance, depreciation, and investments in assets.

Discretionary Fixed Costs

Fixed costs that arise from annual management decisions and can be reduced or eliminated for short periods without significant harm, such as advertising and research and development.

Mixed Cost

A cost containing both a fixed cost component and a variable cost component, expressed by the equation $y = a + bx$.

High-Low Method

A cost estimation method that separates mixed costs into fixed and variable components using data from the highest and lowest activity levels.

Traditional Format Income Statement

An income statement format primarily used for external reporting that organizes expenses by function (Cost of Goods Sold and Selling & Administrative Expenses).

Contribution Format Income Statement

An income statement format primarily used for internal reporting that separates variable expenses from fixed expenses to compute contribution margin.

Contribution Margin

The amount remaining from sales revenue after deducting all variable expenses ($\text{Contribution Margin} = \text{Sales Revenue} - \text{Total Variable Costs}$).

Differential Cost

A cost that differs between two or more decision alternatives; only differential costs and benefits are relevant when making decisions.

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another.

Sunk Cost

A cost that has already been incurred and cannot be changed by any present or future decision, and therefore should be ignored in decision-making.