Ch 5: Cost Behavior

Mixed cost

A cost that contains both variable and fixed cost elements.

Engineering approach

A detailed analysis of cost behavior based on an industrial engineer's evaluation of the inputs that are requried to carry out a particular activity and of the prices of those inputes.

Activity base

A measure of whatever causes the incurrence of a variable cost. For example, the total cost of X-ray film in a hospital will increase as the number of X-rays taken increases.

Account analysis

A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves.

High-low method

A method of separating a mixed cost in its fixed and variable elements by analyzing the change in cost betweeen the high and low activity levels.

Linear cost behavior

Cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity.

Committed fixed cost

Investments in facilities, equipment, and basic organizational structure that can't be significantly reduced even for short periods of time without making fundamental changes.

Contribution margin

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

Step-variable cost.

The cost of a resource that is obtaible only in large chunks and that increases and decreases on in response to fairly wide changes in activity.

Relevant range

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

Cost structure

The relative proportion of fixed, variable, and mixed costs in an organization.

Discretionary fixed costs

Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.

Independent variable

A variable that acts as a causal factor; activity is the independent variable, as represented by the letter X, in the equation Y = a + bX.

Dependent variable

A variable that responds to some causal factor; total costs is the dependent variable, as respresented by the letter Y, in the equation Y = a + bX.

Contribution approach

An income statement format that organizes costs by their behavior. Costs are separated in variable and fixed categories rather than being separated according to organizational functions.