3 Flashcards
cost structure
the relative portion of fixed, variable, and mixed costs in an organization
variable costs
total dollar amount varies in direct proportion to changes in the activity level.
remains constant on a “per unit” basis, but varies in total with activity level
activity base “cost driver”
a measure of whatever causes the incurrence of variable costs.
ex. direct-labor hours, machine-hours, units produced, units sold, # of miles driven by a sales person, # of pounds of laundry cleaned
True variable costs
ex. DM b/c the amount used during a period will vary in direct proportion to the level of productivity. amounts purchased can be stored an carried forward to the next period
Step variable costs
the cost of a resource that is obtain in large chunks and that increases or decreases only in response to fairly wide changes in activity
ex. wages of technicians. A technicians time can only be obtained in large chunks, hired full time. Any time not used fixing something cannot be stored for later use.
relevant range
the range of activity within the assumptions made about cost behavior are reasonably valid.
*assumptions about a cost may be invalid if outside the relevant range
curvilinear
the relationship between cost and activity is a curve
fixed costs sometimes called “capacity costs” b/c
they result from outlays made for buildings, equipment, skilled employees, all items needed to provide the basic capacity for sustained operations
committed fixed costs
**LONG TERM
investments in facilities equipment and the basic organization often can’t be significantly reduced even for short periods of time w/o making fundamental changes.
**even if operations are interrupted or cut back, these costs remain largely unchanged in the short term.
discretionary fixed costs
“managed fixed costs”
**SHORT TERM
arise from annual decisions by management to spend on certain fixed cost items.
ex. advertising, research, public relations, management development programs, internships
- “knowledge” workers
- what kind of cost?
- the demand for highly skilled labor; those who work primarily with their minds, has increased tremendously. their salaries tend to be higher, and they are difficult to replace.
- their wages are often relatively fixed and committed.
mixed costs
“semi variable costs”
equation:
contains both variable and fixed costs elements.
Y= a + bx
*fixed cost represents the minimum cost of a service that is ready and available for use. the variable represents the cost incurred for actual consumption of the service
account analysis
an account is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account behaves.
engineering approach
*must be used when there is no past experience
a detailed analysis of what cost behavior should be, based on the inputs that are required to carry out the activity and of the prices of the inputs.
ex of inputs: material specification, labor requirements, equipment usage, power consumption
cost is known as the __________ b/c the amount of cost incurred during a period depends on the level of activity for the period.
dependent variable
activity is known as the ________ b/c it causes variation in costs.
independent variable
cost behavior is considered linear when….
a straight line is a reasonable approximation for the relation between cost and activity.
high-low method defects
only uses two points, usually those two points tend to be unusual
least squares regression
unlike high-low method, uses all data points to separate a mixed cost into its fixed and variable components.
**vertical measure lines are called regression errors
R^2
higher % = better
measures “goodness of fit”
tells us the percentage of the variation in the dependent variable (cost) that is explained by variation in the independent variable (activity).
Multiple regression
method used when the dependent variable is caused by more than one factor.
ex. shipping costs may depend on the # of units shipped and the weight of the units.
contribution approach
*internal planning/decision making tool
an income statement format that organizes costs by behavior. costs are separated by fixed and variable costs rather than organizational structure.
contribution margin
*internal planning/decision making tool
the amount remaining from sales revenues after variable expenses have been deducted.
this amount contributes to fixed expenses and profits for the period.
