Key Terms and Definitions – Chapter 1
control
The process of evaluating whether the organization’s plans were effectively implemented.
manufacturing costs
All costs related to the production of goods; also called product costs.
U.S. Generally Accepted Accounting Principles (U.S. GAAP)
A set of accounting rules that must be followed to provide consistency in reporting financial
information to external users.
indirect material costs
The costs of materials necessary to manufacture a product that are not easily traced to the
product or that are not worth tracing to the product.
product costs
All costs related to the production of goods; also called manufacturing costs.
cost of goods manufactured
The cost of completed goods transferred from work-in-process inventory into finished
goods inventory.
raw materials inventory
An account used to record the cost of materials not yet put into production.
direct materials
Raw materials used in the production process that are easily traced to the product.
general and administrative costs
Costs related to the overall management of an organization.
cost of goods sold
An expense account on the income statement that represents the product costs for all
goods sold during the period.
period costs
Costs that are not related to the production of goods; also called nonmanufacturing costs.
selling costs
Costs incurred to obtain customer orders and provide customers with a finished product.
manufacturing overhead
All costs associated with the production process other than direct material costs and direct
labor costs.
indirect labor costs
The costs of workers who are involved in the production process but whose time cannot
easily be traced to the product.
direct labor
Labor performed by workers who convert materials into a finished product and whose time
is easily traced to the product.
budget
A series of reports used to quantify an organization’s plan for the future.
financial accounting
Provides historical financial information to external users.
planning
The process of establishing goals and communicating these goals to employees of the
organization.
finished goods inventory
An account used to record the manufacturing costs associated with products that are
completed and ready to sell.
nonmanufacturing costs
Costs that are not related to the production of goods; also called period costs.
work-in-process (WIP) inventory
An account used to record costs associated with products in the production process that are
not yet complete.
managerial accounting
Focuses on internal users, including executives, product managers, sales managers, and any
other personnel in the organization who use accounting information for decision making.
Key Terms and Definitions – Chapter 2
allocation base
The activity used to allocate manufacturing overhead costs to jobs.
overhead applied
The assignment of overhead costs to jobs based on a predetermined overhead rate.
normal costing or traditional costing
A method of costing that uses a single predetermined overhead rate to apply overhead to
jobs.
underapplied overhead
Overhead costs applied to jobs that are less than actual overhead costs.
predetermined overhead rate
A rate established prior to the year in which it is used in allocating manufacturing overhead
costs to jobs.
job costing system
A system that records revenues and costs for each job.
overapplied overhead
Overhead costs applied to jobs that exceed actual overhead costs.
job
An activity that results in a unique product, one easily distinguished from other products.
process costing system
A costing system used by companies that produce identical units of product in batches
employing a consistent process.
cost driver
The allocation base that drives overhead costs.
Key Terms and Definitions – Chapter 3
value-added activities
Activities that add to a product’s quality and performance.
non-value-added activities
Activities that do not add to a product’s quality and performance.
cost pools
A collection of overhead costs, typically organized by department or activity.
activity-based management (ABM)
A management tool that uses cost information obtained from an ABC system to improve the
efficiency and profitability of operations.
activity
Any process or procedure that consumes overhead resources.
plantwide allocation
A method of allocating costs that uses one cost pool, and therefore one predetermined
overhead rate, to allocate overhead costs.
Activity-based costing (ABC)
A method of costing that uses several cost pools, and therefore several predetermined
overhead rates, organized by activity to allocate overhead costs.
cost driver
The action that causes the costs associated with an activity.
department allocation
A method of allocating costs that uses a separate cost pool, and therefore a separate
predetermined overhead rate, for each department.
Key Terms and Definitions – Chapter 4
process costing system
A system of assigning costs used by companies that produce similar or identical units of
product in batches employing a consistent process.
job costing system
A system of assigning costs used by companies that produce unique products or jobs.
Key Terms and Definitions – Chapter 5
high-low method
A method of cost analysis that uses the high and low activity data points to estimate fixed
and variable costs.
relevant range
The range of activity for which the cost behavior patterns are likely to be accurate.
regression analysis
A method of cost analysis that uses a series of mathematical equations to estimate fixed
and variable costs; typically done using computer software.
account analysis
A method of cost analysis that requires a review of accounts by an experienced employee or
group of employees to determine whether the costs in each account are fixed or variable.
variable cost
A cost that varies in total with changes in activity and remains constant on a per unit basis
with changes in activity.
committed fixed cost
A fixed cost that cannot easily be changed in the short run without having a significant
impact on the organization.
mixed cost
A cost that has a combination of fixed and variable costs.
contribution margin
Sales revenue left over after deducting variable costs from sales.
scattergraph method
A method of cost analysis that uses a set of data points to estimate fixed and variable costs.
contribution margin income statement
An income statement used for internal reporting that shows fixed and variable cost
information.
R-squared
Measures the percent of the variance in the dependent variable explained by the
independent variable.
discretionary fixed cost
A fixed cost that can be changed in the short run without having a significant impact on the
organization.
fixed cost
A cost that remains constant in total with changes in activity and varies on a per unit basis
with changes in activity.
Key Terms and Definitions – Chapter 6
contribution margin per unit
The amount each unit sold contributes to (1) covering fixed costs and (2) increasing profit.
operating leverage
The level of fixed costs within an organization.
absorption costing
A costing method that includes all manufacturing costs (fixed and variable) in inventory until
the goods are sold.
margin of safety
The excess of expected sales over the break-even point, measured in units and in sales
dollars.
target profit in units
The number of units that must be sold to achieve a certain profit.
break-even point in units
The number of units that must be sold to achieve zero profit.
break-even point in sales dollars
The total sales measured in dollars required to achieve zero profit.
cost structure
The proportion of fixed and variable costs to total costs.
profit equation
Profit equals total revenues minus total variable costs minus total fixed costs.
sensitivity analysis
An analysis that shows how the CVP model will change with changes in any of its variables.
contribution margin ratio
The contribution margin as a percentage of sales; it measures the amount each sales
dollar contributes to (1) covering fixed costs and (2) increasing profit; also
called contribution margin percent.
Variable costing
A costing method that includes all variable manufacturing costs in inventory until the goods
are sold (just like absorption costing) but reports all fixed manufacturing costs as an expense
on the income statement when incurred.
cost-volume-profit analysis
The process of analyzing how changes in key assumptions (e.g., assumptions related to cost,
volume, or profit) may impact financial projections.
target profit in sales dollars
The total sales measured in dollars required to achieve a certain profit.
contribution margin per unit of constraint
The contribution margin per unit divided by the units of constrained resource required to
produce one unit of product.