Chapter 14 - Cost Behavior

Question 0

Cost Driver

Answer 0

A causal factor that measures the output of the activity that leads (or causes) costs to change.

Question 1

Cost Behavior

Answer 1

The general term describing whether a cost changes when the level of output changes.

Question 2

Relevant Range

Answer 2

The range of output over which the assumed cost relationship is valid for the normal operations of the firm.

Question 3

Fixed Costs

Answer 3

Costs that in total are constant within the relevant range as the level of output increases or decreases.

Question 4

Discretionary Fixed Costs

Answer 4

Fixed costs that can be changed or avoided relatively easily at management discretion.

Question 5

Committed Fixed Costs

Answer 5

Fixed costs that cannot be easily changed.

Question 6

Variable Costs

Answer 6

Costs that in total vary in direct proportion to changes in output within the relevant range.

Question 7

Semi-Variable Costs

Answer 7

The true total cost function increases at a decreasing rate when economies of scale are present. This can be minimized when adhering to a relevant range.

Question 8

Mixed Costs

Answer 8

Costs that have both a fixed and variable component.

Question 9

Step Costs (Semi-Fixed Costs)

Answer 9

Displays a constant level of cost for a range of output and then jumps to a higher level (or step) of cost at some point, where it remains for a similar range of output. The width of the step defines the range of output for which a particular amount of the resource applies.

Question 10

3 Methods For Separating Mixed Costs Into Fixed And Variable Components:

Answer 10

1) The High-Low Method
2) The Scattergraph Method
3) The Method Of Least Squares

Each method requires the simplifying assumption of a linear cost relationship.

Question 11

Expression of cost as an equation for a straight line:

Answer 11

Total Cost = Fixed Cost + (Variable Rate x Output)

Question 12

Dependent Variable

Answer 12

A variable whose value depends on the value of another variable.

Question 13

Independent Variable

Answer 13

A variable that measures output and explains changes in the cost or other dependent variable. A good independent variable is one that causes or is closely associated with the dependent variable. Cost driver.

Question 14

Intercept corresponds to

Answer 14

Fixed cost

Question 15

Slope corresponds to

Answer 15

The variable rate (the variable cost per unit of output).

Question 16

Using the High-Low Method: Variable Rate =

Answer 16

High Point Cost - Low Point Cost / High Point Output - Low Point Output

Question 17

Fixed Cost =

Answer 17

Total Cost At High Point - (Variable Rate x Output At High Point)
OR
Total Cost At Low Point - (Variable Rate x Output At Low Point)

Question 18

Advantages/disadvantages of High-Low Method

Answer 18

Advantages

• Objective
• Quick
• Simple
• Inexpensive
• Easily communicated to others

Disadvantages

• Occurrence of outliers
• Potential for misrepresentative data

Question 19

Advantages/disadvantages of Scattergraph Method

Answer 19

Advantages

• Simple
• Visual representation of the data

Disadvantages
* Subjective (choosing the best-fitting line)

Question 20

Advantages/disadvantages of the Method Of Least Squares (regression)

Answer 20

Advantages

• Objective
• Regression packages can quickly and easily calculate the fixed cost and variable rate

Disadvantages
* Complicated, lengthy process if done by hand

Question 21

Coefficient Of Determination (R squared)

Answer 21

The percentage of variability in the dependent variable explained by an independent variable (ie a measure of activity output). The higher the percentage of cost variability explained, the better job the independent variable does of explaining the dependent variable.