Chapter 5 Managerial Accounting Cost Behavior
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Cost Behavior (p. 92)
How costs react to changes in production volume or other levels of activity.
Fixed costs (p. 92)
Costs that remain the same in total when production volume increases or decreases but that very per unit.
Variable costs (p. 93)
Costs that stay the same per unit, but change in total, as production volume increases or decreases. (direct material, direct labor, factory supplies, etc.)
Relevant Range (p. 94)
The normal range of production that can be expected for a particular product and company.
Step costs (p. 95)
Costs that vary with activity in steps and may look like and be treated as either variable costs or fixed costs; step costs are technically not fixed costs but may be treated as such if they remain constant within a relevant range of production
The cost equation
The a in the equation is the point where the line intersects the vertical (y) axis (the y-intercept), and b is the slope of the line.
Mixed Costs (p. 96)
Costs that include both a fixed and a variable component, making it difficult to predict the behavior of a mixed cost as production changes, unless the cost is first separated into fixed and variable components.
A cost that changes in total and also changes per unit is a mixed cost.
Regression analysis (p. 97)
The procedure that uses statistical methods (least squares regression) to fit a cost line (called a regression line) through a number of data points.
Dependent Variable (p. 98)
The variable in regression analysis that is dependent on changes in the independent variable.
The amount of cost is dependent on production. The y range will be used to identify the dependent variable
Independent Variable (p. 98)
The variable in regression analysis that drives change in the dependent variable.
It drives the cost of the dependent variable.
X range for the independent variable.
Multiple R (correlation coefficient) (p. 101)
Is a measure of the proximity of the data points to the regression line. In addition, the sign of the statistic (+ or -) tells us the direction of the correlation between the independent and dependent variables.
R square (R2)
A measure of goodness of fit (how well the regression line "fits" the data)
Variable cost per unit (p. 102)
As with the regression equation, the slope of the line is interpreted as the variable-cost component of the mixed cost
Total overhead costs (p. 102)
Fixed costs + (Variable cost per unit * number of pizzas)
Fixed costs (p. 102)
Total overhead costs - Variable cost
After-tax cost (p. 103)
Pretax cost X (1-tax rate)
In this case, the impact of income taxes is to reduce the "real" cost of a tax-deductible expense to the business and to increase cash flow.
After-tax benefit (p. 103)
Pretax receipts X (1-tax rate)
In this case, the impact of income taxes is to decrease cash flow to the business.
After-tax income (p. 104)
Pretax income X (1-tax rate)
Absorption (full) costing (p. 104)
A method of costing in which product costs include the costs of direct materials, direct labor, and fixed and variable overhead; required for external financial statements and for income tax reporting.
Variable (direct) costing (p. 104)
A method of costing in which product costs include the cost of direct materials, direct labor, and variable overhead; fixed overhead is treated as period cost; variable costing is consistent with CVP's focus on cost behavior.
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