Accounting 2320 - Cost Behavior and Estimation

Flashcards summarizing key terms and concepts related to cost behavior and estimation in accounting, focusing on definitions and important relationships.

Cost Function

An algebraic function that describes how a cost changes as a cost driver changes, generally assuming costs are linear within a relevant range.

Cost Estimation

Using historical data to determine relationships between costs as a function, essential for effective management practices.

Cost Prediction

Forecasting future costs based on cost functions and estimations; more accurate estimates lead to better predictions.

Dependent Variable (y)

The estimated total cost in a cost function that depends on the independent variable.

Independent Variable (x)

The cost driver in units used in a cost function, which influences the dependent variable.

Fixed Cost

Costs that do not change with the level of activity or cost driver.

Variable Cost

Costs that change directly with the level of activity or cost driver.

High-Low Method

A technique for estimating cost functions using the highest and lowest observations of a cost driver.

Regression Analysis

A statistical method used to measure changes in the dependent variable associated with changes in the independent variable.

Linear Cost Function

A cost function characterized by a straight line, represented mathematically as y = mx + b.

Relevant Range

The range of activity over which the assumptions of a cost function are valid, where costs behave in a linear manner.

Cause-and-Effect Relationship

The relationship where a change in one variable results in a change in another variable, crucial for cost function estimation.

Goodness of Fit

How closely the estimated cost function matches the actual costs, indicating the accuracy of the cost estimation.

Slope Coefficient (m)

The change in total cost for each unit change in the cost driver, determining the steepness of the cost function.

Outlier

An extreme point in data that may influence the cost function estimation, potentially skewing results.

Scatter Diagram

A graph used to plot data points to visually assess the correlation between variables.