GLOSSARY

AAbsorption (or full) costing. A method of accountingfor manufacturing costs that charges both fixed andvariable costs to the product.

Account analysis method. See Observation method.

Accounting information system. A set of proceduresdesigned to provide the financial information neededwithin a business organization.

Activity-based costing (ABC). A method of applyingoverhead to products that considers non–volume-related activities that create overhead costs as well asvolume related activities.

Activity-based management (ABM). The use ofactivity-based costing information to improve businessperformance by reducing costs and improving processes.

Adjusted sales value. A basis for allocating joint coststhat takes into consideration the cost of processing aftersplit-off.

Algebraic distribution method. A method for allocat-ing service department costs to production departmentsusing algebraic techniques. While this method mayprovide the most accurate distribution of costs, it is morecomplicated than the other methods and the resultsobtained may not justify the additional effort involved.

Applied factory overhead. The account creditedwhen applying estimated overhead to production withthe debit to Work in Process. Use of a separate ‘‘ap-plied’’ account avoids confusion with actual overheadcosts charged to Factory Overhead, the control accountin the general ledger.

Attainable standard. A performance criterion thatrecognizes inefficiencies that are likely to result fromsuch factors as lost time, spoilage, or waste.

Average cost method. A commonly used procedurefor assigning costs to the ending inventories under aprocess cost accounting system. Under this method,ending inventories are valued using an average unitcost, computed as follows: (cost of beginning work inprocess þ current period production costs) divided bythe total equivalent production for the period.

BBackflush costing. The name for the accountingsystem used with JIT manufacturing. Costs are not‘‘flushed out’’ of the accounting system until goods arecompleted and sold.

Balanced scorecard. A set of performance measures,both financial and nonfinancial, that is used to evaluatean organization’s or a segment of an organization’sperformance.

Billing rates. The hourly rates that a firm charges itsclients for the various categories of professional laborworked on the job.

Bonus pay. An amount paid to employees in additionto regular earnings for a variety of reasons, such asoutstanding performance, as a result of higher-than-usual company profits.

Break-even analysis. An analytical technique based onthe determination of a break-even point expressed interms of sales revenue or sales volume.

Break-even point. The point at which sales revenueadequately covers all costs to manufacture and sell theproduct, but no profit is earned.

Budget. Management’s operating plan expressed inquantitative terms, such as units of production andrelated costs.

Budget variance (two-variance method). The differ-ence between budgeted factory overhead at the capacityattained and the actual factory overhead incurred.

Budgeted income statement. A summary of antici-pated revenues and expenses for the coming year basedon budgets for sales, manufacturing costs, and nonma-nufacturing expenses (selling, administrative, andother).

By-products. Secondary products with relatively littlevalue that are obtained in the process of manufacturingthe primary product.

CCapacity variance. Reflects an under-or overabsorp-tion of fixed costs by measuring the difference betweenactual hours worked, multiplied by the standard over-head rate, and the budget allowance based on actualhours worked.

Capital expenditures budget. A plan for the timingof acquisitions of buildings, equipment, and otheroperating assets during the year.

Carrying costs. The costs incurred as a result ofmaintaining (carrying) inventories. These costs generallyinclude: materials storage and handling costs; interest,insurance, and taxes; losses from theft, deterioration, orobsolescence; and record keeping and supplies.

Cash budget. Budget showing the anticipated flow ofcash and the timing of receipts and disbursements basedon projected sales, production schedule, and otherexpenses.

Common cost (or indirect [nontraceable] cost).The term used in segment analysis to describe a costthat cannot be traced to, or specifically identified with,a particular business segment.

Contribution margin. The difference between salesrevenue and variable costs.

Contribution margin ratio. The relationship of con-tribution margin to sales.

Contribution pricing. The method of pricing whereany price greater than variable costs is accepted for thepurpose of increasing contribution margin during peri-ods of excess capacity.

Contributory plans. Pension plans that require apartial contribution from the employees.

Control. The process of monitoring the company’soperations and determining whether the objectivesidentified in the planning process are beingaccomplished.

Controllable variance. The amount by which theactual factory overhead costs differ from the standardoverhead costs for the attained level of production.

Conversion cost. The combined cost of direct laborand factory overhead, which is necessary to convert thedirect materials into finished goods.

Cost accounting. Includes those parts of financial andmanagement accounting that collect and analyze costinformation.

Cost accounting system. A set of methods and proce-dures used by a manufacturing organization to accumu-late detailed cost data relating to the manufacturingprocess.

Cost and production report. A summary of cost andproduction data for a particular cost center.

Cost–benefit decision. A decision as to whether thebenefit received from pursuing a certain course ofaction exceeds the costs of that action.

Cost center. A unit of activity, such as a department,to which costs may be practically and equitablyassigned.

Cost driver. The basis used to allocate each of theactivities in activity-based costing such as number ofsetups and number of design changes.

Cost of goods manufactured. Determined by addingthe cost of the beginning work in process to themanufacturing costs incurred during the period,and then subtracting the cost of the ending work inprocess.

Cost of goods sold budget. Consists of informationfrom the direct materials, direct labor, and factoryoverhead budgets, as well as projections of beginningand ending work in process and finished goodsinventories.

Cost of production summary. A report that sum-marizes production costs for a period for each depart-ment and provides the information necessary forinventory valuation.

Cost performance report. Compares the budgetedcosts for a job with its actual costs and indicates thevariance for each line item.

Cost–volume–profit (CVP) analysis. An analyticaltechnique that uses the degrees of cost variability formeasuring the effect of changes in volume on resultingprofits.

Credit memorandum. A document used to notify thevendor that a larger quantity has been received than wasordered.

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DDebit memorandum. A document used to notify thevendor that less materials were received than wereordered.

Defective units. Units of product with imperfectionsthat are considered correctable because the marketvalue of the corrected unit will be greater than the totalcost incurred for the unit.

Defined benefit plan. Pension benefits paid to a re-tired employee based on the employee’s past level ofearnings and length of service with the company.

Defined contribution plan. A plan showing the max-imum amount of contributions that can be made byemployer and employee.

Department-type analysis spreadsheet. One form offactory overhead analysis spreadsheet; a separate analysisspreadsheet is maintained for each department with indivi-dual amount columns for each type of overhead expense.

Differential analysis. A study that highlights the sig-nificant cost data of alternatives.

Differential cost. The difference in cost between twodecision alternatives.

Differential income. The amount of extra profitearned from choosing the better of two alternatives.

Differential revenue. The difference in revenue be-tween two decision alternatives.

Direct charge. A charge that can be exactly measuredand charged to a specific department.

Direct (traceable) cost. The term used in segmentanalysis to describe a cost that can be traced to a specificbusiness segment.

Direct costing. See Variable costing.

Direct distribution method. A method for allocatingservice department costs to production departments.No attempt is made to determine the extent to whichservice departments provide services to each other;instead, all service department costs are distributeddirectly to the production departments.

Direct labor. The cost of labor for employees whowork directly on the product being manufactured.

Direct labor budget. A detailed plan of the laborrequirements in both hours and dollars for a specificperiod of time.

Direct labor cost method. A method of applyingfactory overhead to production based on the amount ofdirect labor cost incurred for a job or process.

Direct labor hour method. A method of applyingfactory overhead to production based on the number ofdirect labor hours worked on a job or process.

Direct materials. Materials that become part of theproduct being manufactured and that can be readilyidentified with a certain product.

Direct materials budget. A detailed plan of the mate-rials requirements in both units and dollars for aspecific period of time.

Distribution costs. Costs incurred to sell and delivera product.

EEconomic order quantity (EOQ). The optimal (mosteconomical) quantity of materials that should be or-dered at one time; represents the order size that mini-mizes total order and carrying costs.

Efficiency variance. The difference between overheadapplied (standard hours at the standard rate) and theactual hours worked multiplied by the standard rate;indicates the effect on fixed and variable overhead costswhen actual hours worked are more or less than stan-dard hours allowed for the production volume.

Electronic data interchange (EDI). The process ofbusiness-to-business electronic communication for thepurpose of expediting commerce and eliminatingpaperwork.

Employee earnings record. A form prepared for eachemployee showing the employee’s earnings each payperiod and cumulative earnings for each quarter and forthe year.

Equivalent production. The number of units thatcould have been completed during a period using thetotal production costs for the period.

Expense-type analysis spreadsheet. One form of fac-tory overhead analysis spreadsheet; a separate analysisspreadsheet is used for each type of overhead expensewith individual amount columns for each department.

FFactory overhead. All costs related to the manufac-ture of a product except direct materials and directlabor; these costs include indirect materials, indirectlabor, and other manufacturing expenses, such as de-preciation, supplies, utilities, maintenance, insurance,and taxes.

Factory overhead analysis spreadsheets. A subsidi-ary record of factory overhead expenses; replaces asubsidiary factory overhead ledger. Analysis

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spreadsheets are commonly used bylarger enterpriseswithseveraldepartments and manydifferent types ofoverheadexpenses.

Factory overhead budget. A budget consisting of theestimated individual factory overhead items needed tomeet production requirements.

Factory overhead ledger. A subsidiary ledger con-taining the individual factory overhead accounts; thetotal of the individual account balances in the subsidiaryledger should equal the balance in the control account,Factory Overhead, in the general ledger.

Favorable variance. The difference when actual costsare less than standard costs.

Federal Insurance Contributions Act (FICA).Federal legislation requiring both employers and em-ployees to pay social security taxes on wages and salaries.

Federal Unemployment Tax Act (FUTA). Federallegislation requiring employers to pay an establishedrate of tax on wages and salaries to provide for compen-sation to employees if they are laid off from theirregular employment.

Financial accounting. The branch of accounting thatfocuses on the gathering of information to be used in thepreparation of external financial statements, that is, bal-ance sheet, income statement, and statement of cash flows.

Finished goods. The inventory account that repre-sents the total cost incurred in manufacturing goodsthat are complete but still on hand at the end of theaccounting period.

First-in, first-out (FIFO). An inventory costingmethod based on the assumption that materials issuedare taken from the oldest materials in stock. Thus,materials issued are costed at the earliest prices paid formaterials in stock, and ending inventories are costed atthe most recent purchase prices.

Fixed costs. Manufacturing costs that remain constantwhen production levels increase or decrease; examplesinclude straight-line depreciation, periodic rent pay-ments, insurance, and salaries paid to productionexecutives.

Fixed overhead budget variance. A measure of thedifference between the actual fixed overhead and thebudgeted fixed overhead.

Fixed overhead volume variance. A measure of thedifference between budgeted fixed overhead and ap-plied fixed overhead.

Flexible budget. A budget that shows expected costsat different production levels.

Flow of costs. The order in which unit costs areassigned to materials issued.

Flow of materials. The order in which materials areactually issued for use in the factory.

For-profit service businesses. These are businessesthat sell services rather than products, such as airlinesand accountants.

Four-variance method. The analysis of fixed andvariable factory overhead costs based on the computa-tion of a spending variance and an efficiency variancefor variable costs and a budget variance and a volumevariance for fixed costs.

Full costing. See Absorption costing.

GGeneral factory overhead expenses. Overhead ex-penses that cannot be identified with a specific depart-ment and must be charged to departments by a processof allocation.

Gross margin (or gross profit). The difference be-tween sales revenue and cost of goods sold.

Gross profit. See Gross margin.

HHigh-low method. A method used to isolate the fixedand variable elements of a semivariable cost; involvescomparison of a high volume and its related cost with alow volume and its related cost to determine thevariable amount per unit and the fixed element.

Holiday pay. An amount paid to employees for desig-nated holidays on which the employee is not requiredto work.

Hourly rate plan. A wage plan under which an em-ployee is paid an established rate per hour for each hourworked.

IIdeal standard. A performance criterion that reflectsmaximum efficiency, with no allowance for lost time,waste, or spoilage.

Incentive wage plan. A wage plan modified to in-crease worker productivity by paying a bonus rate perhour when an employee meets or exceeds establishedproduction quotas.

Indirect (nontraceable) cost. See Common cost.

Indirect labor. The wages and salaries of employeeswho are required for the manufacturing process but

534 Principles of Cost Accounting

who do not work directly on the units being produced;examples include department heads, inspectors, materi-als handlers, and maintenance personnel.

Indirect materials. Materials and supplies necessaryfor the manufacturing process that cannot be readilyidentified with any particular product manufactured orwhose relative cost is too insignificant to measure.

Inventory report. A form prepared when making phy-sical count of inventory on hand and used to reconciledifferences between recorded inventory and the inven-tory quantities determined by physical count.

JJob cost ledger. A subsidiary ledger that consists ofthe individual job cost sheets.

Job cost sheet. A form or computer file used toaccumulate costs applicable to each job under a joborder cost accounting system.

Job order cost system. A method or system of costaccounting that is appropriate for manufacturing opera-tions that produce custom-made or special-order goods.Manufacturing costs are accumulated separately foreach job and recorded on a job cost sheet.

Joint costs. The costs of materials, labor, and over-head incurred during the production of joint products.

Joint products. Two or more products that are ob-tained from the same manufacturing process and arethe primary objectives of the process.

Just-in-time (JIT) inventory system. A system thatsignificantly reduces inventory carrying costs by requir-ing that raw materials be delivered by suppliers to thefactory at the exact time that they are needed forproduction.

KKanban. Card indicating a manufacturing cell’s needfor more raw materials or component parts.

Labor cost standard. A predetermined estimate of thedirect labor cost required for a unit of product based onestimates of the labor hours required to produce a unitof product and the cost of labor per unit.

Labor cost summary. A form showing the allocationof total payroll to Work in Process and FactoryOverhead.

Labor efficiency (usage) variance. The differencebetween the actual number of direct labor hoursworked and the standard hours for the actual level ofproduction at the standard labor rate.

Labor rate (price) variance. The difference betweenthe average hourly direct labor rate actually paid andthe standard hourly rate, multiplied by the number ofhours worked.

Labor time record. A record (usually a computer file)that shows an employee’s time spent on each job.

Last-in, first-out (LIFO). An inventory costingmethod based on the assumption that materials issuedare the most recently purchased materials. Thus, mate-rials issued are costed at the most recent purchaseprices, and ending inventories are costed at the pricespaid for the earliest purchases.

Lead time. The estimated time interval between theplacement of an order and the receipt of materials.

Learning effect. The process that occurs when em-ployees become more efficient at complex productionprocesses the more often they perform the task.

Loss leader. A product line that yields low profit (or aloss) but is retained in order to attract customers whomight also purchase more profitable items.

MMachine hour method. A method of applying factoryoverhead to production based on the number of ma-chine hours used for a job or process.

Magnetic card reader. A machine connected to aremote computer terminal that automatically logs ‘‘on’’and ‘‘off’’ labor time to the accounting departmentthrough the use of magnetic cards that employees swipeinto this machine at the beginning and end of specificjob assignments.

Make-up guarantee. An amount paid to employeesunder a modified wage plan when established productionquotas are not met during a work period. The make-upguarantee is charged to the factory overhead account.

Management accounting. Focuses on both historicaland estimated data that management needs to conductongoing operations and long-range planning.

Management by exception. As relates to varianceanalysis, it is the practice of examining significantunfavorable or favorable differences from standard.

Manufacturers. They convert raw materials into fin-ished goods by using labor, technology, and facilities.

Manufacturing margin. The term commonly used invariable costing to designate the difference betweensales and variable cost of goods sold.

Manufacturing cells. See Work centers.

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Manufacturing (or production) costs. All costs in-curred in the manufacturing process; the costs areclassified into three basic elements: direct materials,direct labor, and factory overhead.

Manufacturing process. The activities involved inconverting raw materials into finished goods throughthe application of labor and incurrence of variousfactory expenses.

Margin of safety. The amount that sales can decreasebefore the company will suffer a loss.

Margin of safety ratio. A relationship computed bydividing the difference between the total sales and thebreak-even point sales by total sales.

Mark-on percentage. A percentage of the manufac-turing cost per unit that is added to provide for sellingand administrative expense and profit.

Master budget. See Static budget.

Materials. The inventory account that represents thecost of all materials purchased and on hand to be usedin the manufacturing process, including raw materials,prefabricated parts, and supplies.

Materials control. Procedures incorporated in thesystem of internal control that are designed to physi-cally protect or safeguard materials (physical control)and to maintain the proper balance of materials onhand (control of the investment in materials).

Materials cost standard. A predetermined estimate ofthe cost of the direct materials required for a unit ofproduct.

Materials ledger. See Stores ledger.

Materials price variance. The difference between theactual unit cost of direct materials and the standard unitcost, multiplied by the actual quantity of materials used.

Materials quantity (usage) variance. The differencebetween the actual quantity of direct materials used andthe standard quantity for the actual level of productionat standard price.

Materials (or stores) requisition. A form, preparedby authorized factory personnel and usually approvedby the production department supervisor, to requestmaterials from the storeroom; represents authorizationfor the storeroom keeper to issue materials for use inproduction.

Merchandisers. Wholesalers or retailers who pur-chase finished goods for resale.

Mixed costs. See Semifixed costs and Semivariablecosts.

Modified wage plan. A wage plan that combinescertain features of the hourly rate and piece-rate plans.

Moving average. An inventory costing method basedon the assumption that materials issued at any time arewithdrawn from a mixed group of like materials, and noattempt is made to identify materials as being from theearliest or most recent purchases. Under this method,an average unit price is computed each time a new lotof materials is received, and the new unit price is usedto cost all issues of materials until another lot isreceived and a new unit price is computed.

NNoncontributory plans. Pension plans that are com-pletely funded by the employer.

Nonfinancial performance measures. These are per-formance measures that are used to evaluate operations,but that are not expressed in dollars, such as thepercentage of defective units produced.

Nonvalue-added activities. Operations that includecosts but do not add value to the product, such asmoving, storing, and inspecting.

Non–volume-related activities. Activities performedthat create overhead costs that are more a function ofthe complexity of the product being made rather thanthe number of units produced; examples are number ofmachine setups and product design changes.

Normal capacity. The level of production that willmeet the normal requirements of ordinary sales de-mand over a period of time; frequently used for budgetdevelopment because it represents a logical balancebetween maximum capacity and the capacity demandedby actual sales volume.

Normal losses. Units lost due to the nature of themanufacturing process. Such losses are unavoidable andrepresent a necessary cost of producing goods.

Not-for-profit service agencies. These include cha-rities, governmental agencies, and some health carefacilities that provide services at little or no cost to theuser.

OObservation (or account analysis) method. A tech-nique used to classify a semivariable cost as either fixedor variable; involves examination and analysis of pastrelationships between the expense and production vo-lume. Based on the observed pattern of cost behavior, adecision is made to classify the expense as either a fixedor variable cost, depending on which it more closelyresembles.

536 Principles of Cost Accounting

Order costs. The costs incurred as a result of orderingmaterials; includes salaries and wages of employeesinvolved in purchasing, receiving, and inspecting mate-rials; communications costs, such as telephone, postage,and forms; and record-keeping costs.

Order point. The point at which an item of inventoryshould be ordered; occurs when a predetermined mini-mum level of inventory on hand is reached. Determin-ing an order point requires consideration of usage, leadtime, and safety stock.

Outliers. Nonrepresentative data points that may bewrongly selected when using the high-low method.

Overapplied (or overabsorbed) factory overhead.The amount by which applied factory overhead exceedsactual factory overhead expenses incurred; representedby a remaining credit balance in Factory Overhead.

Overtime pay. The amount earned by employees atthe regular hourly rate for hours worked in excess ofthe regularly scheduled time.

Overtime premium. The additional pay rate earnedfor working hours in excess of the normal daily orweekly hours.

PPayroll record. A form prepared each pay periodshowing the earnings of all employees for the period.

Payroll taxes. Taxes imposed on employers, includingsocial security tax and federal and state unemployment taxes.

Peanut-butter costing. The practice of assigningcosts evenly to jobs via an overhead rate when, in fact,different jobs consume resources in differentproportions.

Pension costs. The costs incurred by an employer toprovide retirement benefits to employees.

Performance report. A periodic summary of cost andproduction data that are controllable by the manager ofa particular cost center.

Period costs. All costs that are not assigned to theproduct, but are recognized as expense and chargedagainst revenue in the period incurred.

Periodic inventory system. A method of accountingfor inventory that requires estimating inventory duringthe year for interim statements and shutting down opera-tions to count all inventory items at the end of the year.

Perpetual inventory system. A method of accountingfor inventory that provides a continuous record ofpurchases, issues, and balances of all goods in stock.

Piece-rate plan. A wage plan under which an em-ployee is paid a specified rate for each unit or ‘‘piece’’completed.

Planning. The process of establishing objectives orgoals for the organization and determining the meansby which the objectives will be attained.

Practical capacity. The level of production that pro-vides complete utilization of all facilities and personnelbut allows for some idle capacity due to operatinginterruptions, such as machinery breakdowns, idle time,and other inefficiencies.

Predetermined factory overhead rate. A percentageor amount determined by dividing budgeted factoryoverhead cost by budgeted production; budgeted pro-duction may be expressed in terms of machine hours,direct labor hours, direct labor cost, or units. Thepredetermined rate is an estimate used in applyingfactory overhead to production.

Price. In the context of variance analysis, refers to thecost of materials or the hourly wage rate for direct labor.

Prime cost. The combined costs of direct materialsand direct labor incurred in manufacturing a product.

Process cost system. A method or system of costaccounting that is appropriate for manufacturing opera-tions that produce continuous output of homogeneousproducts. Manufacturing costs are accumulated sepa-rately for each department and are recorded on a costof production report.

Product costs. Costs that are included as part ofinventory costs and expensed when goods are sold.

Production budget. A detailed plan indicating thenumber of units that must be produced during a specificperiod of time to meet sales and inventoryrequirements.

Production department. A department in which ac-tual manufacturing operations are performed and theunits being produced are physically changed.

Production department supervisor. The employeewho is responsible for supervising the operational func-tions of a production department.

Production report. A report, used in a process costaccounting system and prepared by the departmenthead, showing beginning units in process, number ofunits completed during the period, ending units inprocess, and their estimated stage of completion.

Production work teams. A recent concept where out-put is dependent upon contributions made by all mem-bers of the work crew or department.

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Professional labor budget. A budget for which thebudgeted hours required for each client service area aremultiplied by the budgeted rate for each category toobtain the total wages expense for each category ofprofessional labor.

Purchase order. A form, prepared by the purchasingagent and addressed to the chosen vendor, that de-scribes the materials ordered, credit terms and prices,and the date and method of delivery; represents thevendor’s authorization to ship goods.

Purchase price variance. The difference between theactual cost of materials and the standard cost.

Purchase requisition. A form, usually prepared by thestoreroom keeper or employee with similar responsibil-ity, that is used to notify the purchasing agent thatadditional materials are needed; represents the agent’sauthority to purchase materials.

Purchasing agent. The employee who is responsiblefor purchasing the materials needed for production. Anindividual in any organization who is responsible forthe purchasing function.

RReceiving clerk. The employee who is responsible forsupervising incoming shipments of materials and mak-ing sure that all incoming materials are checked as toquantity and quality.

Receiving report. A form that is prepared by the receiv-ing clerk for each incoming shipment of materials. Theclerk identifies the materials, determines the quantity re-ceived, and records this information on the receiving reportas well as the name of the shipper, date of receipt, and thenumber of the purchase order identifying the shipment.

Relative sales value. A basis for allocating joint costsproportionally based on the respective selling prices ofthe separate products.

Relevant range. The wide range of production vo-lume in which the firm expects to operate.

Responsibility accounting. The assignment of ac-countability for costs or production results to thoseindividuals who have the most authority to influencecosts or production.

Retailers. A type of merchandiser who sells productsor services to individuals for consumption.

Returned materials report. A form prepared to ac-company materials being returned to the storeroomthat had been previously requisitioned but were notused in production.

Return shipping order. A form prepared by the pur-chasing agent when goods are to be returned to thevendor.

Revenue budget. A budget that projects revenue to bereceived from client business.

SSafety stock. The estimated minimum level of inven-tory needed to protect against stockouts.

Sales budget. A budget that projects the volume ofsales both in units and dollars.

Sales mix. The relative percentage of unit sales amongthe various products made by the firm.

Scattergraph method. A method that estimates astraight line along which the semivariable costs will fallby drawing the line by visual inspection through thedata points plotted on the graph.

Schedule of fixed costs. A listing of fixed overheadcosts, such as depreciation, insurance, and propertytaxes; provides the source from which fixed costs can beallocated to the various departments. Since fixed costsare assumed not to vary in amount from month tomonth, a schedule can be prepared in advance forseveral periods; at the end of a period, a journal entrycan be prepared to record total fixed costs from theinformation provided in the schedule.

Scrap (or waste) materials. By-products that are gen-erated in the manufacturing process; usually, such ma-terials have some value and their costs and revenues areaccounted for separately.

Segment. A division, a product line, a sales territory,or other organizational unit that can be separately identi-fied for reporting purposes and profitability analysis.

Segment margin. The term used in segment analysisfor the excess of segment revenue over direct costsassigned to the segment; common costs are excluded incomputing segment margin.

Selling and administrative expenses budget. A salesforecast that will affect the planned expenditure levelfor such items as sales force compensation, advertising,and travel.

Semifixed (or step) costs. Costs that tend to remainthe same in dollar amount over a certain range ofactivity but increase when production exceeds certainlimits.

Semivariable costs. Manufacturing costs that aresome-what responsive to changes in production but donot change proportionally with increases or decreases

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in volume; examples include indirect materials, indirectlabor, repairs and maintenance, and power.

Sequential distribution (or step-down) method. Amethod for allocating service department costs to pro-duction departments that recognizes the interrelation-ship of the service departments. Costs are firstallocated, sequentially, to other service departments andthen to production departments. The sequence maybegin by distributing the costs of the service depart-ment that renders the greatest amount of service to allother service departments. Alternatively, the costs ofthe service department with the largest total overheadcan be distributed first.

Service. An intangible benefit that does not have phy-sical properties and is consume at the time it is pro-vided; examples include consulting, transporting, andentertaining.

Service department. A department within the factorythat does not work directly on the product but providesneeded services to other departments; examples includea department that generates power for the factory, amaintenance department that maintains and repairsbuildings and equipment, and a cost accounting depart-ment that maintains factory accounting records.

Shift premium. An additional rate of pay added to anemployee’s regular rate as compensation for working anevening or night shift.

Spending variance. The difference between the actualfactory overhead for variable costs and the actual hoursmultiplied by the standard variable rate. See also Budgetvariance.

Split-off point. The point where joint products be-come separately identifiable; may occur during, or atthe end of, the manufacturing process.

Spoiled units. Units of product with imperfectionsthat cannot be economically corrected; they are sold asitems of inferior quality or ‘‘seconds.’’

Stage of completion. The fraction or percentage ofmaterials, labor, and overhead costs of a completed unitthat have been applied during the period to goods thathave not been completed.

Standard. A norm or criterion against which perfor-mance can be measured.

Standard cost accounting. A method of accountingfor manufacturing costs that can be used in conjunctionwith either a job order or process cost accountingsystem. Standard costing makes it possible to determinewhat a product should have cost as well as what theproduct actually cost.

Standard cost card. Form used to summarize thestandard quantities and costs of assembling, testing, andpackaging a given product.

Standard cost system. A system that uses predeter-mined standard costs to furnish a measurement thathelps management make decisions regarding the effi-ciency of operations.

Standard costs. The costs that would be incurredunder efficient operating conditions and are forecastbefore the manufacturing process begins. The prede-termined standard costs are compared with actual man-ufacturing costs incurred and are used by managementas a basis for evaluating operating efficiency and takingcorrective action, when necessary.

Standard production. The volume on which the in-itial calculation of standard costs is based.

Standard unit cost for factory overhead. The resultof estimating factory overhead cost at the standard, ornormal, level of production, considering historical dataand future changes and trends.

Static (or master) budget. A budget that is preparedfor only one level of activity.

Step costs. See Semifixed costs.

Step-down method. See Sequential distributionmethod.

Step fixed cost. Semivariable production cost thatremains the same over a wide range of production (e.g.,the salaries of factory supervisors).

Step variable cost. A type of semivariable cost thatremains constant in total over a range of productionand then abruptly changes.

Stockout. Running out of an item of inventory; mayoccur due to inaccurate estimates of usage or lead timeor other unforeseen events, such as the receipt ofdamaged or inferior materials from a supplier.

Storeroom keeper. The employee who is responsiblefor the storing and maintaining of materialsinventories.

Stores (or materials) ledger. A subsidiary ledger sup-porting the Materials control account in the generalledger. The individual accounts in the stores ledger areused to record receipts and issues of materials and showthe quantity and cost of materials on hand.

Stores requisition. See Materials requisition.

Summary of factory overhead. A schedule of allfactory overhead expenses incurred during a period;prepared from the factory overhead analysis

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spreadsheets, the schedule shows each item of overheadexpense by department and in total.

Summary of materials issued and returned. A formused to record all issuances of materials to the factory,returns of materials previously requisitioned, and re-turns of materials to the vendors (sellers). The sum-mary, when completed at the end of a period, providesthe information needed to record the cost of materialsfor the period.

TTarget volume. The amount of sales volume needed,in units or dollars, to cover all costs and earn a certainamount of profit.

Theoretical capacity. The maximum number of unitsthat can be produced with the completely efficient useof all available facilities and personnel.

Three-variance method. The analysis of factoryoverhead costs based on the computation of efficiency,capacity, and budget (spending) variances.

Throughput time. The time that it takes a unit tomake it through the production process.

Touch labor. Category of factory payroll costs thatcan be traced directly to an individual job (also knownas ‘‘direct labor’’).

Transferred-in costs. The portion of a department’stotal costs that were incurred by and transferred from aprior production department.

Trigger points. Points in the production process atwhich to record journal entries in a backflush system.

Two-variance method. The analysis of factory over-head costs based on the computation of the volumevariance and the budget variance.

UUnder-and overapplied factory overhead. An ac-count used to accumulate differences from period toperiod between actual and applied factory overhead. Atthe end of the year, the balance in this account may beclosed to Cost of Goods Sold (if the amount is relativelysmall) or allocated on a pro rata basis to Work inProcess, Finished Goods, and Cost of Goods Sold (ifthe amount is material).

Underapplied (or underabsorbed) factory overhead.The amount by which actual factory overhead exceedsapplied factory overhead; represented by a remainingdebit balance in Factory Overhead.

Unfavorable variance. The difference when actualcosts exceed standard costs.

Unit cost. The cost of manufacturing one unit ofproduct.

Units from the prior department. Units that havebeen completed as to the transferor department andthat are raw materials as to the transferee department.

Usage. The quantity of materials used or the numberof direct labor hours worked.

VVacation pay. An amount paid to employees duringtheir vacation periods as part of the employees’ com-pensation for services to the employer.

Variable costing. A method of accounting for manu-facturing costs that charges the product with only thecosts that vary directly with volume: direct materials,direct labor, and variable factory overhead.

Variable costs. Manufacturing costs that vary in directproportion to changes in production volume; includesdirect labor, direct materials, and some types of factoryoverhead.

Variable overhead efficiency variance. A measure ofthe change in the variable overhead consumption thatoccurs because of efficient or inefficient use of the costallocation base, such as direct labor hours.

Variable overhead spending variance. A measure ofthe effect of differences in the actual variable overheadrate and the standard variable overhead rate.

Variance. The difference, during an accounting per-iod, between the actual and standard or budgeted costsof materials, labor, and overhead.

Velocity. The speed with which units are produced ina manufacturing system. It is the inverse of thethroughput time.

Vendor’s invoice. A form, usually received from thevendor before goods are delivered, confirming a pur-chase of materials and representing a ‘‘bill’’ for theordered goods. The purchasing agent should comparethe invoice with the related purchase order to verify thedescription of materials, price, terms of payment,method of shipment, and delivery date.

Volume variance. The difference between budgetedfixed overhead and the fixed overhead applied to workin process; the result of operating at a level of produc-tion different from the standard, or normal, level.

Volume-related activities. Activities performedwhere all overhead costs are directly related to thevolume produced; examples are direct labor hours andmachine hours.

540 Principles of Cost Accounting

WWaste materials. See Scrap materials.

Wholesaler. A type of merchandiser who purchasesgoods from manufacturers and sells to retailers.

Work centers. Combined manufacturing functionsthat were performed in individual departments in atraditional manufacturing system.

Work in process. The inventory account that includesall the manufacturing costs incurred to date for goodsthat are in various stages of production but are not yetcompleted.

Work shift. A regularly scheduled work period for adesignated number of hours.

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