CHAPTER 1

Value chain - set of activities that transforms raw resources into the goods and services that
end users purchase and consume.

Value-added activities - those activities that customers perceive as adding utility to the goods
or services they purchase.

Component Example Activities Example Costs

Research and The creation and development of ideas  Research personnel
development related to new products, services or  Patent applications
processes.  Laboratory facilities
Design The detailed development and engineering  Design centers
of products, services or processes.  Engineering facilities
used to develop and
test prototypes
Purchasing The acquisition of goods and services  Purchasing
needed to produce a good or service. department personnel
 Vendor certification
Production The collection and assembly of resources to  Machines and
produce a product or deliver a service equipment
 Factory personnel
Marketing and The process of informing potential  Advertising
sales customers about the attributes of products  Focus group travel
or services that leads to their sale  Product placement
Distribution The process for delivering products or  Trucks
services to customers  Fuel
 Website creation,
hosting, and
maintenance
Customer service The support activities provided to  Call center personnel
customers for a product or service  Returns processing
 Warranty repairs

Supply chain - set of firms and individuals that sells goods and services to the firm.

Distribution chain - set of firms and individuals that buys and distributes goods and services
from the firm.

Financial accounting - field of accounting that reports financial position and income according
to accounting rules.

Cost accounting - field of accounting that measures, records, and reports information about
costs.
Generally Accepted Accounting Principles (GAAP) - rules, standards, and conventions that
guide the preparation of financial accounting statements for firms registered in the United
States.

International Financial Reporting Standards (IFRS) - rules, standards, and conventions that
guide the preparation of the financial accounting statements in many other countries.

Nonvalue-added activities - activities that do not add value to the good or service.

Cost-benefit analysis - process of comparing benefits (often measured in savings or increased

profits) with costs associated with a proposed change within an organization.

Cost driver - factor that causes, or “drives,” costs.

Differential costs - with two or more alternatives, costs that differ among or between
alternatives.

Differential revenues - revenues that change in response to a particular course of action.

Responsibility center - specific unit of an organization assigned to a manager who is held
accountable for its operations and resources.

Budget - financial plan of the revenues and resources needed to carry out activities and meet
financial goals.

Activity-Based Costing (ABC) - costing method that first assigns costs to activities and then
assigns them to products based on the products’ consumption of activities.
Performance measure - metric that indicates how well an individual, business unit, product,
firm, and so on, is working.

Benchmarking - continuous process of measuring a company’s own products, services, or

activities against competitors’ performance.

Just-In-Time (JIT) Method - in production or purchasing, each unit is purchased or produced

just in time for its use.

Lean accounting - cost accounting system that provides measures at the work cell or process
level and minimizes wasteful or unnecessary transaction processes.

Customer Relationship Management (CRM) - system that allows firms to target profitable
customers by assessing customer revenues and costs.

Outsourcing - having one or more of the firm’s activities performed by another firm or
individual in the supply or distribution chain.

Total Quality Management (TQM) - management method by which the organization seeks to
excel on all dimensions, with the customer ultimately defining quality.

Cost of Quality (COQ) - system that identifies the costs of producing low-quality items,
including rework, returns, and lost sales.

Enterprise Resource Planning (ERP) - information technology that links the various systems of
the enterprise into a single comprehensive information system.

Title Major Responsibilities and Primary Example Activities

Duties
Chief Financial  Manages entire finance and  Signs off on financial
Officer (CFO) accounting function statements
 Determines policy on
debt versus equity
financing
Treasurer  Manages liquid assets  Determines where to
 Conducts business with banks and invest cash balances
other financial institutions  Obtains lines of credit
 Oversees public issues of stock and
debt
Controller  Plans and designs information and  Determines cost
incentive systems accounting policies
 Maintains the accounting
records
 Internal Auditor  Ensures compliance with laws,  Ensures that
regulations and company policies procurement rules are
and procedures followed
 Provides consulting and auditing  Recommends policies and
services within the firm procedures to reduce
inventory losses
Cost Accountant  Records, measures, estimates, and  Evaluates costs of
analyzes costs products and processes
 Works with financial and  Recommends cost-
operational manager to provide effective methods to
relevant information for decisions distribute products

CHAPTER 2
Cost - sacrifice of resources.

Expense - cost that is charged against revenue in an accounting period.

Outlay cost - past, present, or future cash outflow.

Opportunity cost - forgone benefit from the best (forgone) alternative course of action.

Operating profit - excess of operating revenues over the operating costs necessary to generate
those revenues.
Cost of Goods Sold - expense assigned to products sold during a period.

Product costs - costs assigned to the manufacture of products and recognized for financial
reporting when sold.

Period costs - costs recognized for financial reporting when incurred.

Direct manufacturing costs - product costs that can be feasibly identified with units of
production.

Indirect manufacturing costs - all product costs except direct costs.

Direct materials - materials that can be identified directly with the product at reasonable cost.

Direct labor - labor that can be identified directly with the product at reasonable cost.

Manufacturing overhead - all production costs except direct labor and direct materials.

Prime costs - sum of direct materials and direct labor.

Conversion costs - sum of direct labor and manufacturing overhead.

Marketing costs - costs required to obtain customer orders and provide customers with
finished products, including advertising, sales commissions, and shipping costs.

Administrative costs - costs required to manage the organization and provide staff support,
including executive salaries, costs of data processing, and legal costs.

Cost allocation - process of assigning indirect costs to products, services, people, business units,
etc.

Cost object - any end to which a cost is assigned; examples include a product, a department, or
a product line.

Cost pool - collection of costs to be assigned to the cost objects.

Cost allocation rule - method used to assign costs in the cost pool to the cost objects.

Cost flow diagram - diagram or flowchart illustrating the cost allocation process.

Direct cost - any cost that can be directly (unambiguously) related to a cost object at
reasonable cost.

Indirect cost - any cost that cannot be directly related to a cost object.

Work in process - product in the production process but not yet complete.

Finished goods – product fully completed, but not yet sold.

Fixed costs - costs that are unchanged as volume changes within the relevant range of activity.

Variable costs - costs that change in direct proportion with a change in volume within the
relevant range of activity.

Relevant range - activity levels within which a given total fixed cost or unit variable cost will be
unchanged.
Semivariable cost - cost that has both fixed and variable components; also called mixed cost.

Step cost - cost that increases with volume in steps; also called semifixed cost.

Full cost - sum of all costs of manufacturing and selling a unit or product (includes both fixed
and variable costs).

Full absorption cost - all variable and fixed manufacturing costs; used to compute a product’s
inventory value under GAAP.

Contribution margin - Sales price – Variable costs per unit.

CHAPTER 3
Cost-Volume-Profit (CVP) Analysis - study of the relations among revenues, costs, and volume
and their effect on profit.

Profit equation - operating profit equals total revenue less total costs.
Unit contribution margin - difference between revenues per unit (price) and variable costs per
unit.

Total contribution margin - difference between revenues and total variable costs.

Break-even point - volume level at which profits equal zero.

Profit-volume analysis - version of cost-volume-profit analysis using a single profit line.

Cost structure - proportion of fixed and variable costs to total costs of an organization.

Operating leverage - extent to which an organization’s cost structure is made up of fixed costs.
It is calculated as contribution margin divided by operating profit.

Margin of safety - the excess of projected or actual sales over the break-even volume.

Margin of safety percentage - the excess of projected or actual sales over the break-even
volume expressed as a percentage of the actual volume.