What is sales mix? Definition of Sales Mix Sales mix is the relative proportion or ratio of a business’s products that are sold. Sales mix is important because a company’s products usually have different degrees of...
What is sales mix? Definition of Sales Mix Sales mix is the relative proportion or ratio of a business’s products that are sold. Sales mix is important because a company’s products usually have different degrees of...
What is a responsibility center? Definition of Responsibility Center A responsibility center is a part or subunit of a company in which the manager has some degree of authority and responsibility. The company’s...
What is the production volume variance? Definition of Production Volume Variance The production volume variance is associated with a standard costing system used by some manufacturers. This variance arises when there is...
What is a variable cost? Definition of Variable Cost A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with the change in volume...
Is a favorable variance always an indicator of efficiency in operation? In a standard costing system, some favorable variances are not indicators of efficiency in operations. For example, the materials price variance,...
What are the methods for separating mixed costs into fixed and variable? Definition of Mixed Costs Mixed costs are partially a fixed cost and partially a variable cost. Mixed costs are also known as semivariable costs....
Why do manufacturers use standard costs? One reason for a manufacturer to use standard costs is to plan carefully what its costs will be for the upcoming budgeting year and to then compare the actual costs with those...
What is the difference between a differential cost and an incremental cost? Definition of Differential Cost and Incremental Cost I use the terms differential cost and incremental cost to mean the same thing: the...
What is a budget variance? A budget variance results when an actual amount is different from a planned or budgeted amount. A budget variance can occur for revenues and for expenses. Join PRO to Track Progress Mark the...
What is the difference between correlation and cause and effect? Definition of Correlation Correlation refers to the association between two or more variables. The association is measured by a statistic known as the...
What is an independent variable? In accounting, an independent variable is ideally a factor that causes a change in the total amount of the dependent variable. In other words, an independent variable should be something...
Why does the internal rate of return equate to a net present value of zero? Internal rate of return and net present value are discounted cash flow techniques. To discount means to remove the interest contained within the...
What is a cost driver? Ideally, a cost driver is an activity that is the root cause of why a cost occurs. In the past century, the root cause of indirect manufacturing costs has changed from a single cost driver (such as...
What is a non-discount method in capital budgeting? Definition of Non-discount Method of Capital Budgeting A non-discount method of capital budgeting is one that does not consider the time value of money. In other words,...
What is an implicit interest rate? Definition of Implicit Interest Rate An implicit interest rate is one that is not stated explicitly. Example of Implicit Interest Rate Assume that I lend you $4,623 and you agree to...
What is a dependent variable? In accounting, a dependent variable is likely to be the total of a mixed cost that will change as the result of several factors. A factor that causes the change in the total cost is referred...
What is the margin of safety? Definition of Margin of Safety In break-even analysis, the term margin of safety indicates the amount of sales that are above the break-even point. In other words, the margin of safety...
What is process costing? Definition of Process Costing Process costing is a term used in cost accounting to describe one method for collecting and assigning manufacturing costs to the units produced. A processing cost...
What is the payback reciprocal? The payback reciprocal is a crude estimate of the rate of return for a project or investment. The payback reciprocal is computed by dividing the digit “1” by a project’s payback...
What is absorption costing? Definition of Absorption Costing Absorption costing (also known as full absorption costing) indicates that all of the manufacturing costs have been assigned to (absorbed by) the units of goods...
What is cash flow net of tax? I view cash flow net of tax as the amount of cash spent minus the income tax savings when the amount is deductible on the corporation’s income tax return. To illustrate this, let’s...
How much of the contribution margin is profit on units sold in excess of the break-even point? After the break-even point is reached, the entire contribution margin on the next units sold will be profit…provided the...
What are the benefits of a revenue budget? The main benefit of a revenue budget is that it requires looking into the future. The revenue budget should contain the assumptions made about the future and the details about...
What is an indirect cost? Definition of Indirect Cost An indirect cost is a cost that is not directly traceable to a cost object (product, department, etc.). Rather, the indirect cost is sometimes referred to as a common...
What are conversion costs? Definition of Conversion Costs Conversion costs is a term used in cost accounting that represents the combination of direct labor costs and manufacturing overhead costs. In other words,...
What is the normal balance of the direct materials variance accounts? I don’t believe there is a normal balance. If a company pays exactly the standard cost of its direct materials, there will be no balance in the...
What is job order costing? Definition of Job Order Costing Job order costing or job costing is a system for assigning and accumulating manufacturing costs of an individual unit of output. The job order costing system is...
Should a company focus on cash flows or accounting profits when making a capital expenditure decision? Using the incremental cash flows and discounting them to reflect the time value of money is the preferred method. The...
What is an incremental cost? Definition of Incremental Cost An incremental cost is the difference in total costs as the result of a change in some activity. Incremental costs are also referred to as the differential...
What is a sunk cost? Definition of Sunk Cost A sunk cost is a cost that was incurred in the past and cannot be undone. Since most transactions cannot be undone, most amounts spent in the past are sunk. A past or sunk...
What is the difference between cost and price? Definition of Cost and Price In accounting, the term cost can mean the cash or cash equivalent amount a company paid to acquire an asset or the amount of an expense it...
What is disinvestment? In business, disinvestment means to sell off certain assets such as a manufacturing plant, a division or subsidiary, or product line. Disinvestment is sometimes described as the opposite of capital...
What are out-of-pocket costs? Out-of-pocket costs are those costs or expenses that require a cash payment in the current period or during a project. For example, the wages of the person setting up a machine for a new...
What is managerial accounting? Definition of Managerial Accounting Managerial accounting is also known as management accounting and it includes many of the topics that are included in cost accounting. Some of the...
What are net incremental cash flows? Net incremental cash flows are the combination of the cash inflows and the cash outflows occurring in the same time period, and between two alternatives. For example, a company could...
What is NPV? Definition of NPV NPV is the acronym for net present value, which can be calculated as follows: The present value of the future cash inflows Minus the cash investment Example of NPV Assume that a company...
What do overabsorbed and underabsorbed mean? Definition of Overabsorbed and Underabsorbed In cost accounting, overabsorbed and underabsorbed pertain to a manufacturer’s manufacturing overhead costs. The manufacturing...
What do negative variances indicate? Definition of Negative Variances on Accounting Reports Negative variances are the unfavorable differences between two amounts, such as: The amount by which actual revenues were less...
What is the difference between a cost center and a profit center? Definition of Cost Center A cost center is a subunit of a company that is responsible only for its costs. A few examples of cost centers are: Production...
What is responsibility accounting? Definition of Responsibility Accounting Responsibility accounting involves the internal accounting and budgeting for each responsibility center within a company. The objective of...
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