Accounting Ch. 5

high-low method

(one of the three different methods to analyze mixed costs, all using the linear assumption as a base) a simple approach that uses the two most extreme data points to determine the slope of the line (variable cost per unit) and the intercept (total fixed cost)

step costs; variable; fixed

___ ___ are fixed over a range of activity and then increase in a step-like fashion when a capacity limit is reached. depending on the width of the steps, step costs may be treated as either step-____ or step-____ cost.

variable cost per unit = difference in total cost/difference in activity = (y1-y2)/(x1-x2)

formula for calculating variable cost per unit under the high-low method

total fixed cost = total cost - (variable cost per unit x activity)

high low method: formula for total fixed cost

constant; declines

in the relevant range, total fixed costs ___ as activity increases. fixed cost per unit ___ as activity increases.

increase; constant

in the relevant range, total variable costs ___ as activity increases. variable cost per unit is ___ as activity increases.

total variable cost

(cost behavior summary: variable/fixed and total/unit) changes proportionately with changes in activity within the relevant range

variable cost per unit

(cost behavior summary: variable/fixed and total/unit) remains constant for each additional unit as long as activity is in the relevant range

total fixed cost

(cost behavior summary: variable/fixed and total/unit) remains the same even when activity changes within the relevant range

cost behavior

___ ___ describes the way total cost behaves, or changes, when some measure of activity changes.

contribution margin

___ ___ is the difference between sales revenue and variable costs

mixed

____ costs contain a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage. utilities usually behave in this manner

vertical; horizontal

a scattergraph presents a visual representation of the relationship between total cost and activity. it is a graph with total cost plotted on the ____ axis and some measure of activity on the ____ axis. it is useful for getting a "feel" for the data and helps answer preliminary questions about the nature of the relationship between total cost and activity, and whether there are unusual patterns or outliers in the data.

increase; decrease

for mixed costs, total mixed costs ___ as activity increases and per unit mixed costs ___ as activity increases

contribution margin = sales revenue - variable costs

formula for contribution margin

relevant range; total

the ___ ___ is the range of activity within which our assumptions made about cost behavior hold true. for example, we assume that total ___ cost will remain constant and that unit variable costs will remain constant over a limited range of activity

fixed cost per unit

(cost behavior summary: variable/fixed and total/unit) the amount changes each time the level of activity changes due to the fixed nature of the related costs

scattergraph

(one of the three different methods to analyze mixed costs, all using the linear assumption as a base) a graph that provides a visual representation of the relationship between total cost (y) and activity level (x). a (term) is a useful first step in analyzing cost behavior because it helps determine the nature of the relationship and whether the linearity assumption is valid.

least-squares regression

(one of the three different methods to analyze mixed costs, all using the linear assumption as a base) a statistical technique for finding the best fitting line based on historical data. the slope of the line provides an estimate of the variable cost per unit, while the intercept provides an estimate of the total fixed cost

contribution margin ratio = contribution margin/sales revenue

contribution margin ratio formula

fixed; variable

mixed costs contain a ___ portion that is incurred even when the facility is unused, and a ___ portion that increases with usage. utilities usually behave in this manner.

variable; fixed

step-___ costs tend to be fixed over a fairly narrow range of activity and rise in multiple steps across the relevant range. step-____ costs are fixed over a much wider range of activity than are the other step-costs. because these costs are fixed over a fairly wide range of activity, they are treated as fixed costs, at least within a limited range of activity