Accounting 202 Chapter 3

Except in step variable costs, we assume a ______ relationship between cost and volume

linear

activity base

measure of whatever causes the incurrence of a variable cost

Contribution approach

provides managers with an income statement that clearly distinguishes between fixed and variable costs and therefore facilitates planning, control and decision making - seperate costs into fixed and variable, first deducting variable expenses from sales

Relevant range

range of activity within which the assumption made about cost behavior are reasonably valid

a line that is fit to the data points is a ______ line, a line for which approximately an equal number of point fall above and below it

straight

Y = a + bx

y - total mixed cost a= total fixed cost (vertical intercept) b- variable cost per unit (slope) x - level of activity

Equation of relationship between mixed cost and level of activity

y = a + bx *steeper the slope higher the variable cost per unit*

analysis of mixed costs

- fixed portion of a mixed cost represents the minimum cost of having a service read and available for use - the variable portion represents the cost incurred for actual composition of the service

Three techniques can be used to separate the fixed and variable components of a mixed cost

- scattergraph method - high low method - least squares method

The functions used in excel to do regression are

- slope - intercept - rsq (goodness of fit or R square)

relation between cost and activity is_____

a curve

Account Analysis

account is classified as either variable or fixed based on the analysts prior knowledge of how cost in the account behaves

______ is the independent variable

activity, on x axis causes variation in the costs

examples of discretionary fixed costs

advertising, research, PR, internships

contribution margin

amount remaining from sales revenue after variable expenses have been deducted

Multiple regression

analytical method that is used when the dependent variable is caused by more than one factor

Discretionary fixed costs

arise from annual decisions by management to spend certain fixed cost items

examples of committed fixed costs

building depreciation, real estate taxes, insurance expenses

Mixed cost

contains both variable and fixed cost elements, semivariable costs

High low method?

cost at high activity level - cost at low activity level / high activity level - low activity level

Variable cost

cost whose total dollar amounts varies in direct proportion to changes in the activity level

_____is known as the dependent variable

cost, because the amount during the period depends on the level of activity (Y)

Contribution format?

costs are organized by their behavior rather than by traditional function of production, sales and administration

Step variable costs

costs of a resource that is obtained in large chunks and increases or decreases only in response to wide changes in activity -maintenance workers

engineering approach?

detailed analysis of what cost behavior should be based on industrial engineers evaluation of the production methods to be used * in situations where no past experience is available concerning activity and costs*

True variable costs

direct materials because the amount used during the period will vary in direct proportion to level of activity

Step fixed costs are _____ for a range of activity and then jump up to another level of costs

fixed

Total costs equation

fixed costs + variable costs per unit *units

Wages and Salaries may be?

fixed or variable, differ from country to country

Trend in many industries is toward

greater fixed costs relative to variable costs

Cost behavior

how a cost will change as the level of activity changes

Fixed costs should be expressed as

in total rather than on a per unit basis

Fixed cost per unit ________ as volume ________

increases, decreases

Committed fixed costs?

investments in facilities, equipment cant be reduced even for short periods of time without making fundamental changes

the width of the step depicted for step variable costs is

much narrower than the width of the steps depicted for fixed costs (relates to volume or level of activity)

the least squares method is more ______ and _____ than the scattergraph

objective and precise

R2

percentage of the variation in the dependent variable (cost) that is explained by variation in the independent variable (activity - higher number better - good or bad fit

Cost structure?

relative proportion of each type of cost in an organization

Fixed Cost definition

remain constant in total dollars as volume changes within the relevant range of activity

Variable cost ______ if expressed on a per unit basis

remains constant

Discretionary fixed costs can be cut for

short periods of time with minimal damage to long run goals, can be adjusted from year to year

The relevant range of activity for a fixed cost is

the range of activity over which the graph of the cost is flat

fixed cost equation

total cost - variable cost element

what are the defects of the high low method

use only two data points

Least Squares regression method

uses all data to seperate a mixed cost into its fixed and variable components, computes the regression line that minimizes the sum of these squared errors

slope of the line is the

variable cost

Ordinary single lease square regression analysis is used ??

when a variable cost is a function of only a single factor