Costing and Decision Making

Dependent variable

Cost to be predicted and managed in cost estimation

Absorption costing

Costing method where fixed manufacturing overhead is treated as a period cost

Variable costing

Costing method where lease charges on factory building are inventoriable cost

Sunk costs

Costs that are always irrelevant when making decisions

Make-or-buy decisions

Decisions about whether to insource or outsource the production of goods or services

Independent variable

Factor used to predict the dependent variable in cost estimation

Qualitative factors

Factors that need to be considered when selecting among alternatives

Graphical display of a cost function

Graphical representation of a cost function where the steepness of a line represents the total amount of fixed costs

Income under absorption costing

Income calculated using absorption costing method

Income under variable costing

Income calculated using variable costing method

Absorption-costing income statements

Income statements that do not differentiate between variable and fixed costs

Cost function

Mathematical description of how a cost changes with changes in the level of an activity

Simple regression analysis

Method that estimates the relationship between the dependent variable and one independent variable

Quantitative analysis methods of cost estimation

Methods such as high-low method and regression analysis used for cost estimation

Quantitative factors

Outcomes that are measured in numerical terms

Relevant revenues

Revenues that remain the same for two alternatives being examined