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Chapter 5: Cost Behavior: Analysis And Use

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Account analysis
a metiod for analyzing cost behavior in which an account is classified as wither VC or FC based on the analyst's prior knowledge of how the cost in the account behaves
activity base
a measure of whatever causes the incurrence of a VC.
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
contribution approach
an income statement format that organizes costs by their behavior.  costs are separated into VC and FC categories rather than being separated according to organizational functions.
contribution margin
the amount remaining from sales revenues after all variable expenses have been deducted
cost structure
the relative proportion of fixed, variable, and mixed costs in an organization
dependent variable
a variable that responds to some casual factor; total cost is the dependent variable, as represented by the letter Y:  Y=a+bX
discretionary fixed costs
those FC that arise from annual decisions by management to spend on certain FC items, such as advertising and research
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
high-low method
a method of separating a mixed cost into its FC and VC elements by analyzing the change in cost between the high and low activity levels
independent variable
a variable that acts as a casual factor; activity is the independent variable as represented by the letter X:  Y=a+bX
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 whenever a straight line is a reasonable approximation for the relation between cost and activity.
mixed cost
a cost that contains both VC and FC elements
Multiple regression
an analytical method required when variations in a dependent variabble are caused by more than one factor
R2 (R squared)
a measure of goodness of fit in least-squares regression analysis.  it is the percentage of the variation in the dependent variable that is explained by variation in the independent...
relevant range
the range of activity within which assumptions about VC and FC behavior are reasonably valid
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.


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