Chapter 3: Managerial Accounting

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 required to carry out a particular activity and of the prices of those inputs

R2

A measure of goodness of fit in least-squares regression analysis. It is the percentage of the variation in the dependent variable and fixed cost behavior are reasonable valid

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 take 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 account behaves.

High-Low Method

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

Least-squares regression Method

A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimizes the sum of the squared errors

Linear Cost Behavior

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

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 obtained in large chunks and that increases and decreases only in response to fairly wide range of activity

Relevant Range

The range of activity within which assumptions about variable and fixed cost behavior is 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 casual factor; activity is the independent variable represented by letter X in Y=a+bX

Dependent Variable

A variable that responds to some casual factor; total cost is the dependent variable as represented by the letter Y in Y=a+bX

Multiple Regression

An analytical method required when variations in a dependent variable are caused by more than one factor

Contribution Approach

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

Committed Fixed Costs

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