Chapter 3 Flashcards
output-cost relationship
assume output changes, did costs also change?
- -fixed costs = unaffected
- -variable costs = direct relationship
cost object
item for which managers want cost information
–multiple cost components
activity drivers
explain changes in activity costs by measuring changes in activity output
unit-level drivers
vary with number of units produced
non-unit-level drivers
factors other than units produced
fixed costs
costs that in total are constant within the relevant range as the level of the activity driver varies
–as production increases, total remains constant but per unit cost decreases
variable costs
costs that vary in direct proportion to changes in an activity driver
–the total cost of direct materials for each level of production varies, but the unit cost stays the same
mixed costs
costs that have both a fixed and a variable component
Y = F + VX
or the total cost = fixed costs + variable costs per unit x the number of units
resources
economic elements that enable one to perform activities
activity capacity
capacity needed to perform activity
practical capacity
capacity for maximum efficiency
–usually activity capacity = practical activity
unused capacity
acquired capacity - used capacity
activity rate
average unit cost obtained by dividing the resource expenditure by the activity’s practical capacity
activity availability =
activity output + unused capacity
cost of activity supplied =
cost of activity used + cost of unused activity
activity rate =
cost of activity/ number of units
flexible resources
supplied as needed (supply = demand)
- -no unused capacity
- ->kinda like variable costs
committed resources
supplied in advance of usage
- -possible unused capacity
- ->kinda like fixed costs
step-up function
displays a constant level of cost for a range or output and then jumps to a higher level of cost at some point
step-variable costs
follow a step-cost behavior with narrow steps
approximate variable costs
step-fixed costs
follow a step-cost function with wide steps
approximate fixed costs
each (wide) step = relevant range
industrial engineering method
a forward-looking method of determining through physical observation and analysis, just what activities, in what amounts, are needed to complete a process
–precise, but expensive
account analysis method
used to estimate costs by classifying accounts in the general ledger as fixed, variable, or mixed
–our best guess
high-low method
take two points (the high and low by volume of activity) and determine the slope and intercept --slope is variable rate --intercept is fixed cost advantages: --objective --simple to calculate disadvantages: --high and low points may be outliers --other pairs of points may clearly be more representative
scatterplot method
uses a scattergraph to visually assess the relationship between cost and output
–intercept is fixed cost
–slope is variable rate
advantages:
–allows for visual inspection of the data
–identifies nonlinearity, outliers, and shifts in the cost relationship
disadvantages:
–subjective
hypothesis test of cost parameters
t-stat, p-value (want less than .10 to show significance)
coefficient of determination
Rsquared: shows the percent of variability in the dependent variable explained by the independent variable
coefficient of correlation
square root of the coefficient of determination when there is one independent variable
–higher the magnitude, the greater the correlation
confidence intervals
Predicted cost for a given level of activity +/- t distribution (using degrees of freedom) x the standard error shown in the regression output
degrees of freedom =
number of observations- number of variables
relevant range
the range over which the assumed cost relationship is valid for the normal operations of a firm
