Key Terms III

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 behaves

Question 2

Activity base

Answer 2

A measure of whatever causes the incurrence of a variable cost

Question 3

Adjusted R2

Answer 3

A measure of goodness of fit in least-squares regression analysis. It is the percentage of the variation in the dependent variable that is explained by variation in the independent variable

Question 4

Committed fixed costs

Answer 4

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

Question 5

Contribution approach

Answer 5

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 the production, sales, and administrations

Question 6

Cost structure

Answer 6

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

Question 7

Curvilinear costs

Answer 7

A relationship between cost and activity that is a curve rather than a straight line

Question 8

Dependent variable

Answer 8

A variable that reacts or responds to some casual factor; total cost is the dependent variable, as representated by the letter Y, in the equation Y=a+bX

Question 9

Discretionary fixed costs

Answer 9

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

Question 10

Engineering approach

Answer 10

A detailed analysis of cost behaviour based on an industrial engineers evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs

Question 11

High-low method

Answer 11

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 12

Independent variable

Answer 12

A variable that acts as a casual factor; activity is the independent variable, as represented by the letter X, in the equation Y=a+bX

Question 13

Least-squares regression method

Answer 13

A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimised the sum of the squared errors

Question 14

Mixed cost

Answer 14

A cost that contains both variable and fixed cost elements

Question 15

Multiple regression

Answer 15

An analytical method required in those situations where variations in a dependent variable are caused by more than one factor

Question 16

Regression line

Answer 16

A line fitted to an array of plotted points

Question 17

Relevant range

Answer 17

The range of activity within which assumptions without variable and fixed cost behaviour are valid

Question 18

Scattergraph method

Answer 18

A method of separating a mixed cost into fixed and variable elements

Question 19

Step-variable cost

Answer 19

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