Ch. 3 - Cost behaviour: analysis and use

Question 1

Account analysis

Answer 1

A method for analysing cost behaviour in which each account under consideration is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account behave.

Question 2

Activity base

Answer 2

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 taken increases. Therefore, the number of X-rays is an activity base for explaining the total cost of X-ray film

Question 3

Committed fixed costs

Answer 3

Those fixed costs that are difficult to adjust and that relate to the investment in facilities, equipment, and the basic organizational structure of a firm

Question 4

Contribution approach

Answer 4

A profit statement format that is geared to cost behaviour in that costs are separated into variable and fixed categories rather than being separated according to the functions of production, sales, and administration.

Question 5

Contribution margin

Answer 5

The amount remaining from sales revenues after all variable expenses have been deducted.

Question 6

Cost structure

Answer 6

The relative proportion of fixed, variable and mixed costs found within an organization.

Question 7

Discretionary fixed costs

Answer 7

Those fixed costs that arise from annual decisions by management to spend in certain fixed cost areas, such as advertising and research.

Question 8

High–low method

Answer 8

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

Question 9

Mixed cost

Answer 9

A cost that contains both variable and fixed cost elements.

Question 10

Step-variable cost

Answer 10

A cost (such as the cost of a maintenance worker) that is obtainable only in large chunks and that increases and decreases only in response to fairly wide changes in the activity level.