Chapter 2 - Cost Behavior, Operating Leverage, and Profitability Analysis (Vocabulary Flashcards)

Vocabulary flashcards covering key concepts from Chapter 2: cost behavior (fixed, variable, mixed), relevant range, operating leverage, contribution margin, and methods for estimating cost behavior (high-low, scattergraph, regression).

Fixed Cost

A cost whose total amount remains unchanged as volume changes.

Variable Cost

A cost that varies in direct proportion to volume; total variable cost changes with volume, while the variable cost per unit remains constant.

Mixed Costs (Semivariable Costs)

Costs that have both fixed and variable components (e.g., a base fixed fee plus an hourly variable charge).

Relevant Range

The range of activity over which the definitions of fixed and variable costs are valid.

Context-Sensitive Definitions of Fixed and Variable

The same cost can behave as fixed or variable depending on the activity base being considered.

Fixed Cost Behavior

Total fixed cost does not change with changes in volume.

Variable Cost Behavior

Total variable cost changes in direct proportion to volume; unit variable cost may remain constant.

Per-Unit Variable Cost

The variable cost attributed to each individual unit; e.g., $16 per ticket, constant per unit.

Operating Leverage

The use of fixed costs to magnify small changes in revenue into larger changes in profitability.

Contribution Margin

The amount available to cover fixed expenses and contribute to profit; equals revenue minus variable costs.

Contribution Margin Income Statement

An income statement format that separates variable costs from fixed costs to highlight contribution margin.

Magnitude of Operating Leverage

A measure of how responsive profits are to changes in revenue; higher leverage implies profits move more with revenue.

Break-Even Point

The level of sales at which total revenues equal total costs; beyond this point, profits begin to accumulate.

High-Low Method

A technique to estimate fixed and variable cost components using the highest and lowest activity levels.

Scattergraph Method

A graphical method to estimate fixed and variable costs; the slope represents variable cost per unit and the intercept represents fixed cost.

Regression Method (Least-Squares)

A statistical method to estimate cost behavior by fitting a line to data using least squares.

R-Squared (R2)

A reliability measure indicating the percentage of total cost variation explained by the regression model.

Multiple Regression

A regression analysis with more than one independent variable to improve cost estimates.

Cost Averaging

Using daily or weekly time frames to average costs and determine a representative average cost per unit.

Band Cost Fixed Example

A fixed-cost illustration: an arrangement paying $48,000 for a single concert demonstrates fixed cost behavior. When used for multiple concerts, it may become variable.

Variable Cost Example (Ticket)

An example where variable cost per unit remains constant (e.g., $16 per ticket) while total variable cost changes with volume.

Risk and Reward Assessment

Assessing how shifting from fixed to variable costs affects risk and potential profits; fixed costs increase risk but can limit profits, while variable costs reduce risk but may limit upside.