Key Terms

Rework that arises as a result of an unusual event

Spoilage that arises as a result of an unusual event

A costing system that attaches fixed manufacturing costs to goods

A budgeting method that involves budgeting the amount of cost driver and the amount of cost per unit of cost driver for each activity the firm engages in

A costing system in which overhead costs are pooled based on activities; the goal is to make the costs assigned to jobs more accurate by associating each pool of overhead with a cost allocation base that is highly related to it

A cost actually incurred, as opposed to a budgeted or standard cost

A costing system in which all costs are recorded at their actual amounts

Assigned to a cost object; used when a cost is indirect (cannot be traced)

A table containing present value factors for an annual series of cash flows occurring in the future

The area on a graph where any combination of points constitutes a feasible solution; that is, a solution where all constraints are satisfied

Total cost divided by number of units

The level of sales where a firm earns a profit of $0

Predicted cost

An income statement consisting of predicted revenues and expenses for a particular period, rather than actual revenues and expenses

Predictions of financial results for future periods

An incidental product resulting from the production of other products; while its sale may earn revenues for the company, those revenues are not reported separately on the company’s income statement

The total costs a business incurs to store and maintain inventory, typically including storage costs, insurance and taxes, depreciation, obsolescence, shrinkage, and the opportunity cost of capital tied up in unsold inventory

The amount of cash inflows collected during a period

The amount of cash outflows disbursed during a period

Sales which the customer pays cash for at the time of purchase

Limitations on production capacity due to limited resources

Gradual, continuous reduction of cost, increase of revenue, or improvement of process over time

The amount that sales contribute towards covering fixed costs and producing profit, or revenue minus variable costs

A format of income statement in which contribution margin (sales minus variable costs) is emphasized to users

The percentage of revenue that contributes towards covering fixed costs and producing profit, calculated as contribution margin divided by revenue or unit contribution margin divided by sales price

Direct labor cost plus manufacturing overhead cost

Something of value given up to achieve an objective

Spreading a common cost among cost objects in a systematic way

A measure that is used to allocate costs to cost objects; the cost is allocated in proportion to the amount of cost allocation base used by each cost object

An activity that causes a cost to change

An algebraic expression of a firm’s costs, which splits the firm’s typical costs into variable and fixed portions

Something one is trying to find the cost of

The cost of goods completed during a period

The cost of goods sold during a period

A budget for the cost of goods the company plans to sell, measured in dollars

The way in which a firm’s costs break down into variable and fixed portions

An analysis that uses the relationships between a firm’s revenue, variable costs, and fixed costs to determine profit outcomes

Sales which the customer pays cash for after the time of purchase

Rework that arises because a customer requests repairs on units that were not originally classified as defective

Spoilage that arises because a customer rejects units that were not originally classified as defective

A cost that can be easily traced to a cost object

Manufacturing labor costs that can be easily traced to the product

A budget for how much direct labor the firm plans to use in production, measured in hours and dollars

Materials costs that can be easily traced to the product

A budget for how much direct materials the firm plans to purchase during the period, measured in units of direct materials and dollars

A budget for how much direct materials the firm plans to use in production, measured in units of direct materials and dollars

Convert to present value

The rate of return used to find the present value of cash flows in a particular analysis

A budget for the value of ending finished goods inventory, reflecting the product costs that went into manufacturing the goods in ending finished goods inventory, measured in dollars

The number of units that could have been completed given the amount of work that went into physical units, calculated by multiplying the number of physical units by their completion percentage

An analysis that calculates the net present value of a project using the expected value of the project’s potential future cash flows

The sum of all potential outcomes multiplied by their probability of occurrence

A cost that is recognized on the income statement during a period

Inventory of goods that are completed but not yet sold

A cost that does not change, in total, when production changes

A budget that is prepared for a range of sales estimates instead of a single estimate of sales

The standard cost of the actual sales volume

A format of income statement in which gross margin (sales minus cost of goods sold) is emphasized to users

A statement reporting revenues and expenses for a particular period

A cost that cannot be easily traced to a cost object

Manufacturing labor costs that cannot be easily traced to the product

Materials costs that cannot be easily traced to the product

The annual rate of return a project actually earns

A costing system in which the firm manufactures goods that are customized or made to customer specifications; the goal of the costing system is to assign a unique cost to each job performed

Costs occurring before the splitoff point in a joint process

A single process that results in more than one product

Products produced in a joint process

A budgeting method that incorporates continuous improvement into the budgeting process

A mathematical model for finding the best outcome

Investments that affect the firm’s capacity; typically, the effects of the investment last for longer than a year

The branch of accounting that provides financial information to managers for their use in making decisions

All indirect manufacturing costs

A budget for how much the firm plans to spend on manufacturing overhead, measured in dollars, and for the predetermined overhead rate the firm plans to use

The difference between a firm’s actual volume and breakeven volume

Desired profit expressed as a percentage of costs

A set of budgeted financial statements

The principle that expenses should be recognized in the same period as the revenues they are associated with

The financial effect of a decision on a company’s profit

All revenues minus all expenses, including tax (after-tax income)

The net of the present value of all cash flows associated with a long-term investment

A technique used for analyzing potential long-term investments, in which the net present value of the investment is calculated and compared to zero to determine whether it is financially worthwhile

Final sales value of the product less its separable costs

A costing system in which direct manufacturing costs and period costs are recorded in the accounts at their actual amounts, while manufacturing overhead is initially recorded in the accounts at the amount that is allocated to products

Rework that arises as part of the normal production process

Spoilage that arises as part of the normal production process

A mathematical representation of the objective you are trying to optimize

A decline in the value of inventory because it is no longer in demand, it is outdated, or it is no longer usable

A budgeted income statement from revenue through operating income

Revenue-producing departments

Operating revenues minus operating expenses (before tax)

The costs assigned to a product are too high to reflect the resources that actually go into manufacturing it

Producing more units than needed to meet current demand and inventory requirements

The time required to earn back a project’s initial investment, without considering the time value of money

A cost that is expensed in the period incurred, usually non-manufacturing

A budget for the nonmanufacturing costs the company plans to incur, measured in dollars

The volume at which profit is equal between two cost structures

A group of aggregated overhead costs, usually put together because they are related to the same department, function, or activity, and which are allocated together using a common cost allocation base

The rate at which manufacturing overhead is applied to products, expressed as a rate per unit of cost allocation base

The value of an amount of money at the present time

A multiplier used to discount cash flows, determined by the discount rate and the length of time until cash flows will occur (in the case of a single amount) or the length of time cash flows will occur on an annual basis (in the case of an annuity)

A costing system used in firms that mass-manufacture products; the goal is to assign an identical cost to each unit

A cost associated with manufacturing the product

A system used to attach manufacturing costs to products, which determines the value of each unit of production, work-in-process inventory, finished goods inventory, and cost of goods sold

How much of each of a firm’s products is sold relative to each other

A budget for how many units the firm plans to produce, measured in output units

Revenues minus expenses (income)

Desired profit expressed as a percentage of revenue

Inventory of materials used to produce the company’s goods

The choices management has to make changes to a project as it unfolds

An analysis that incorporates the expected value of a project’s potential future cash flows and management’s options

Describes a cost or benefit that occurs in the future and differs across alternatives

An analysis that compares the relevant costs and benefits of two or more alternatives to determine which alternative is most profitable

The range of unit volumes in which a cost function is applicable; limited to the range of unit volumes that have occurred in the past

The rate of return required by a company’s equity holders and/or debtholders

A budget for how much revenue the firm plans to earn, measured in dollars

Inflows of assets received from customers in exchange for products or services

The cost of repairing defective units so they can be sold as good units

Budgets that are updated each period by adding a new period to the end of the budget as the last time period expires

How much the product can be sold for at the splitoff point

A “what-if” analysis in which managers examine different predicted scenarios, which can be useful when economic conditions are uncertain

Costs that occur after the splitoff point in a joint process; can be traced to individual products

Non-revenue-producing departments that provide services to support both operating departments and other service departments

Loss of inventory due to causes such as theft, damage, or administrative errors

A table containing present value factors for a single cash flow occurring in the future

The point where products in a joint process become separately identifiable

The cost to produce units that are ruined during production that cannot be sold as good units

How much a unit should cost

How much of an input such as pounds, gallons, hours, or cost allocation base should be used per unit

How much a unit of input should cost

The standard price of the actual quantity of input used

The standard cost of the budgeted sales volume

The profit a firm hopes to achieve

Any expected cash flows at the end of the project

Revenues minus direct materials cost

The idea that money is worth more in the present than in the future

Able to be traced to a cost object

The price set for goods sold internally, from one division of a firm to another

The costs assigned to a product are too low to reflect the resources that actually go into manufacturing it

Producing fewer units than needed to meet current demand

The amount that each sales unit contributes towards covering fixed costs and producing profit, or sales price minus variable cost per unit

Total cost divided by number of units

A cost that changes, in total, when production changes

A costing system that only attaches variable manufacturing costs to goods, while fixed manufacturing costs are expensed in the period incurred

The difference between an actual amount (of revenue, cost, or profit) and a budgeted amount, expressed as the effect on profit of that difference, and a label indicating whether the effect is favorable or unfavorable

A method of process costing in which prior period costs and current period costs are averaged over all units worked on during the current period

Inventory of goods for which production is incomplete

A budgeting method that initially sets every budget in the organization to zero, requiring managers to justify every budgeted cost every period