MANAGERIAL ACCOUNTING – 12th Edition

CH 5 TERMS

Account analysis – A method of analyzing cost behavior 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.

Activity base – A measure of whatever causes the incurrence of a variable cost.

Committed fixed costs – Those costs that are difficult to adjust and that relate to investment in facilities, equipment, and basic organization structure.

Contribution approach – An income statement format that is geared to cost behavior in that costs are separated into variable and fixed categories rather than being separated according to the functions of production, sales, and administration.

Contribution margin – The amount remaining from sales revenue after all variable expenses have been deducted.

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

Dependent variable – A variable that responds to some casual factor; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX.

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

Engineering approach – A detailed analysis of cost behavior based on an industrial engineer’s evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs.

High-low method – A method of separating mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels.

Independent variable – 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.

Least square regression method – A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimizes the sum of the squared errors.

Linear cost behavior – Cost behavior is said to be linear whenever straight line is a reasonable approximation for the relation between cost and activity.

Mixed costs – A cost that contains both variable and fixed cost elements.

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

R²– A measure of goodness of fit in least-square regression analysis.

Relevant range – The range of activity within which assumptions about variable and fixed costs behavior are valid.

Step-variable cost – The cost of a source that is obtainable only on large chunks and that increases and decreases only in response to fairly wide changes in the activity level.