Managerial Accounting chapter 2

committed fixed costs

represent organizational investments with a multiyear planning horizon that cant be significantly reduced even for short periods of time without making fundamental changes. examples: investments in facilities and equipment, real estate taxes, insurance expenses

contribution margin

the amount remaining from sales revenues after variable expenses have been deducted. this amount contributes toward covering fixed expenses and then towards profit at the end of the period.

variable cost

varies, in total, in direct proportion to changes in the level of activity. Examples: direct materials, direct labor, variable elements of manufacturing overhead. must be variable with activity base

Discretionary fixed costs

(managed fixed costs) arise from annual decisions by management to spend on certain fixed cost items. Examples: advertising, research, public relations, internships for students

R^2

A measure of goodness of fit in least-squares regression analysis. it is the percentage of the variation in the DV that is explained by variation in the IV.

fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity. not affected by changes in activity.

engineering approach

a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation of the production methods to be used, the materials specifications, labor requirements, equipment usage, production efficiency

activity base

a measure of whatever causes the incurrence of a variable cost. referred to as a cost driver. Examples: direct labor-hours, machine-hours, units produces, and units sold

account analysis

an account is classified as either variable or fixed based on the analysts prior knowledge of how the cost in the account behaves.

mixed cost

contains both variable and fixed cost elements. (semivariable)

linear

cost behavior is considered linear whenever a straight line is a reasonable approximation for the relation between cost and activity

contribution approach

crucial distinction between fixed and variable costs. it provides managers with an income statement that clearly distinguishes between fixed and variable coasts and therefore aids planning, controlling, and decision making.

cost behavior

how a cost reacts to changes in the level of activity. as the activity level rises and falls, a particular cost may rise and fall as well- or it may remain constant

relevant range

the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable.

cost structure

the relative proportion of each type of cost in an organization (variable, fixed, or mixed)