ACCT 220 Chapter 5

2 major differences between step-variable and fixed costs changing in large increments

1. Step-variable costs can often be changed quickly if needed, fixed costs can usually not 2. The width of the steps for step-variable costs is much narrower than the width of the steps fixed costs

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

Activity base

A measure of whatever causes the incurrence of a variable cost.

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

Least-squares regression method

A method of separating a mixed cost into its fixed and 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 whenever a straight line is a reasonable approximation for the relation between cost and activity

Committed fixed costs

Investments in facilities, equipment, and basic organizational structure that cannot 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 obtained in large chunks and that increases and decreases only in response to fairly wide changes in activity

Relevant range

The range of activity within which assumptions about variable and fixed cost 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

Contribution approach

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