Managerial accounting Chapter 2

Mixed Costs

A cost that contains both variable and fixed cost elements.

Variable Cost

A cost that varies, in total, in direct proportion to changes in the level of activity. Is constant per unit.

Discretionary fixed costs

Arise from annual decisions by management to spend on certain fixed cost items. Referred to as managed fixed costs.

High-low method

Begin by identifying the period with the lowest level of activity and the period with the highest level of activity.

Committed fixed costs

Represents organizational investments with a multi year planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes.

Dependent Variable

The amount of cost incurred during a period depends on the level of activity for the period.

Relevant Range

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Cost behavior

The way in which a cost reacts to changes in the level of activity.

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on per unit basis, it varies inversely with the level of activity.

Engineering approach

A detailed analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer evaluation of the production methods to be used, the materials specifications, labor requirements, equipment usage, productions efficiency. power consumption, etc.

Activity Base

A measure of whatever causes the incurrence of a variable cost. Can be referred as a "cost driver".

Account analysis

Ac account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in account behaves.

Independent Variable

It causes variations in the cost.

Contribution approach

It provides managers with an income statement that distinguishes between fixed and variable costs and therefore aids planning, controlling, and decision making.

Least- squares regression method

Uses all of the data to separate a mixed cost into it's fixed and variable components.

Contribution Margin

the amount remaining from sales revenues after variable expenses have been deducted.

The total mixed cost equation

y = total fixed costs + (variable cost per unit of activity x Activity level)