EXAM 2 Chapters 6 9 Absorption Costing The costing method where products absorb both fixed and variable manufacturing costs Account Analysis A method for determining cost behavior that is based on a manager s Chapter 6 judgment in classifying each general ledger account as a variable fixed or mixed cost Committed Fixed Costs Fixed costs that are locked in because of previous management decisions management has little or no control over these costs in the short run Contribution Margin Sales revenue minus variable expenses Contribution Margin Income Statement Income Statement that organizes costs variable or fixed by behavior rather than by function Cost Behavior Describes how costs change as volume changes Cost Equation A mathematical equation for a straight line that expresses how a cost behaves Curvilinear Costs A cost behavior that is not linear Discretionary Fixed Costs Fixed costs that are a result of annual management decisions fixed costs that are controllable in the short run fixed Costs Costs that do not change in total despite wide changes in volume High Low Method A method for determining cost behavior that is based on two historical data points the highest and lowest volume of activity Mixed Cost Costs that change but not in direct proportion to changes in volume mixed costs have both variable cost and fixed cost components Regression Analysis A statistical procedure for determining the line that best fits the data by using all of the historical data points not just the high and low data points Scatter Plot A graph that plots historical cost and volume data Step Costs A cost behavior that is fixed over a small range of activity then jumps to a different fixed level with moderate changes in volume Outliers Abnormal data points data points that do not fall in the same general pattern as the other data points Variable Costs Costs that change in total in direct proportion to changes in volume Variable Costing The costing method that assigns only variable manufacturing costs to products Chapter 7 Breakeven Point Sales level at which operating income is zero Total Revenues equals total expenses Contribution Margin Sales revenue minus variable expenses Contribution Margin per Unit Unit Contribution Margin The excess of the unit sales price over the variable cost per unit Contribution Margin Income Statement An income statement that groups costs by behavior rather than function it can be used only by internal management Contribution Margin Ratio Ratio of contribution margin to sales revenue Cost Volume Profit CVP Analysis Expresses the relationships among costs volume and profit or loss Margin of Safety Excess of expected sales over breakeven sales the drop in sales a company can absorb without incurring an operating loss Operating Leverage The relative amount of fixed and variable costs that make up a firm s total costs Operating Leverage Factor At a give level of sales the contribution margin divided by operating income the operating leverage factor indicates the percentage change in operating income that will occur from a 1 change in sales volume Sales Mix The combination of products that make up total sales Sensitivity Analysis A what if technique that asks what results will be if actual prices or costs change or if an underlying assumption changes Chapter 8 Constraint A factor that restricts production or sale of a product Cost Plus Pricing An approach to pricing used by price setters Cost plus begins with the product s total costs and adds the company s desired profit to determine a cost plus price Opportunity Cost The benefit forgone by not choosing an alternative course of action Outsourcing A make or buy decision Managers decide whether to buy a product or service or produce it in house Relevant Information quantitative qualitative Expected future data that differs among alternatives Short Term Special Decisions Selling as is or processing further Sunk Cost irrelevant A past cost that cannot be changed regardless of which future action is taken Target Costing An approach to pricing used by price takers Target costing begins with the revenue at a market price and subtracts the company s desired profit to arrive at the target total cost How Managers Make Decisions Define business goals Identify alternative courses of action Gather and analyze relevant information Choose best alternative Implement decision Follow up Compare actual with anticipated Chapter 9 Budget Committee A committee comprised of upper management as well as cross functional managers who review revise and approve the final budget COD Collect on Delivery or Cash on Delivery A sales term indicating that the inventory must be paid for at the time of delivery Cost Center A responsibility center for which the manager is responsible for costs only Cost of Goods Sold Inventory and Purchases Budget A merchandiser s budget that computes the cost of goods sold the amount of desired ending inventory and amount of merchandise to be purchased Financial Budgets The budgets that project the collection and payment of cash as well as forecast the company s budgeted balance sheet Investment Center A responsibility center for which the manager is accountable for revenues costs and the efficient use of the assets Line of Credit A lending arrangement from a bank in which a company is allowed to borrow money as needed up to a specified maximum amount yet only pay interest on the portion that is actually borrowed until it is repaid Management by Exception Directs management s attention to important differences between actual and budgeted amount Master Budget The comprehensive planning document for the entire organization The master budget includes the operating budgets and the financial budgets Operating Budgets The budgets needed to run the daily operations of the company The operation budgets culminate in a budgeted income statement Participative Budgeting Budgeting that involves the participation of many level of management Profit Center A responsibility center for which the manager is responsible for both costs and revenues and therefore profit Responsibility Accounting A system for evaluating the performance of ach responsibility center and its manager Responsibility Center A part or subunit of an organization whose manager is accountable for specific activities Revenue Center A responsibility center for which the manager is accountable for revenues only Rolling Budget A budget that is continuously updated so that the