Chapter 3

Question 1

output-cost relationship

Answer 1

assume output changes, did costs also change?

• -fixed costs = unaffected
• -variable costs = direct relationship

Question 2

cost object

Answer 2

item for which managers want cost information

–multiple cost components

Question 3

activity drivers

Answer 3

explain changes in activity costs by measuring changes in activity output

Question 4

unit-level drivers

Answer 4

vary with number of units produced

Question 5

non-unit-level drivers

Answer 5

factors other than units produced

Question 6

fixed costs

Answer 6

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

Question 7

variable costs

Answer 7

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

Question 8

mixed costs

Answer 8

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

Question 9

resources

Answer 9

economic elements that enable one to perform activities

Question 10

activity capacity

Answer 10

capacity needed to perform activity

Question 11

practical capacity

Answer 11

capacity for maximum efficiency

–usually activity capacity = practical activity

Question 12

unused capacity

Answer 12

acquired capacity - used capacity

Question 13

activity rate

Answer 13

average unit cost obtained by dividing the resource expenditure by the activity’s practical capacity

Question 14

activity availability =

Answer 14

activity output + unused capacity

Question 15

cost of activity supplied =

Answer 15

cost of activity used + cost of unused activity

Question 16

activity rate =

Answer 16

cost of activity/ number of units

Question 17

flexible resources

Answer 17

supplied as needed (supply = demand)

• -no unused capacity
• ->kinda like variable costs

Question 18

committed resources

Answer 18

supplied in advance of usage

• -possible unused capacity
• ->kinda like fixed costs

Question 19

step-up function

Answer 19

displays a constant level of cost for a range or output and then jumps to a higher level of cost at some point

Question 20

step-variable costs

Answer 20

follow a step-cost behavior with narrow steps

approximate variable costs

Question 21

step-fixed costs

Answer 21

follow a step-cost function with wide steps
approximate fixed costs
each (wide) step = relevant range

Question 22

industrial engineering method

Answer 22

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

Question 23

account analysis method

Answer 23

used to estimate costs by classifying accounts in the general ledger as fixed, variable, or mixed
–our best guess

Question 24

high-low method

Answer 24

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

Question 25

scatterplot method

Answer 25

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

Question 26

hypothesis test of cost parameters

Answer 26

t-stat, p-value (want less than .10 to show significance)

Question 27

coefficient of determination

Answer 27

Rsquared: shows the percent of variability in the dependent variable explained by the independent variable

Question 28

coefficient of correlation

Answer 28

square root of the coefficient of determination when there is one independent variable
–higher the magnitude, the greater the correlation

Question 29

confidence intervals

Answer 29

Predicted cost for a given level of activity +/- t distribution (using degrees of freedom) x the standard error shown in the regression output

Question 30

degrees of freedom =

Answer 30

number of observations- number of variables

Question 31

relevant range

Answer 31

the range over which the assumed cost relationship is valid for the normal operations of a firm