Chapter 2 study guide Essay

Chapter 2 study guide:
Raw materials refer to any materials that are used in the final product, and the final product, and the finished product of one company can become the raw materials of another company.
Direct materials are those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product.
Indirect materials are included as part of manufacturing overhead.
Indirect labor is labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience.
Manufacturing Overhead includes all manufacturing costs except direct materials and direct labor.
Selling cost include all costs that are incurred to secure customer orders and get the finished product to the customer.
Administrative cost includes all costs associated with the general management of an organization rather than with manufacturing or selling.
Product cost includes all costs involved in acquiring or making a product.
Period cost is all the costs that are not product costs. All selling and administrative expenses are treated as period costs.
Prime Cost is the sum of direct materials cost and direct labor cost.
Conversion cost is the sum of direct labor cost and manufacturing overhead cost.
Cost behavior refers to how a cost reacts to changes in the level of activity.
Variable cost varies, in total, in direct proportion to changes in the level of activity.
Activity base is a measure of whatever causes the incurrence of a variable cost.
Fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity.
Committed fixed cost represent organizational investments with a multiyear planning horizon that can’t be significantly reduced even for short periods of time without making fundamental changes.
Discretionary fixed costs usually arise from annual decisions by management to spend on certain fixed cost items.
Relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.
A mixed cost contains both variable and fixed cost elements. Mixed costs are also known as semi variable costs.
Y=Ax+B
Y= the total mixed cost
A= the total fixed cost (the vertical intercept of the line)
B= the variable cost per unit of activity (the slope of the line)
X= the level of activity
Account analysis is an account is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account balances.
Engineering approach to cost analysis involves a detailed analysis of what cost behavior should be.
Dependent variable or Y is plotted on the vertical axis.
Independent variable or X is plotted on the horizontal axis.
Cost behavior is considered linear whenever a straight line is a reasonable approximation for the relation between cost and activity.
High-low method, begin by identifying the period with the lowest level of activity and the period with the highest level of activity.
Variable Cost = Slope of the line = Rise/Run = Y2-Y1/X2-X1
Variable Cost = Y2-Y1/X2-X1 = Cost at the high activity level – Cost at the low activity level/ High activity level – Low activity level
Variable Cost = Change in cost/ change in activity
Least square regression method uses all of the data to separate a mixed cost into its fixed and variable components.
Sales minus cost of goods sold equal the gross margin. The gross margin minus selling and administrative expenses equals net operating income.
Cost of goods sold = beginning merchandise inventory + Purchases – Ending merchandise inventory
Contribution approach is that it provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision making.
Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted.
Direct cost is a cost that can be easily and

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