ACC 154 Exam #2

Ch. 6, 7, 8

cost behavior

A behavior that describes how costs change as volume changes

variable costs

Costs that are incurred for every unit of volume. As a result, total variable costs change in direct proportion to changes in volume. or example, every guest at Embassy Suites is entitled to a complimentary morning breakfast. Hotel’s total cost for the complimentary breakfast wil increase as the number of guests increase.

cost equation

A mathematical equation for a straight line that expresses how a cost behaves.

Fixed costs

Costs that don’t change in total despite wide changes in volume.

Committed fixed costs

Fixed costs that are locked in because of previous management decisions; management has little or no control over these costs in the short run. For example, as soon as a hotel is built, management becomes locked in to a certain amount of property taxes.

discretionary fixed costs

Fixed costs that are the result of annual management decisions; fixed costs that are controllable in the long run. For example, advertising expenses that result from annual management decisions.

Mixed costs

Costs that change but not in direct proportion to changes in volume. Mixed costs have both variable cost and fixed cost components. For example, Embassy Suites’ utilities.

relevant range

The band of volume where total fixed costs remain constant at a certain level and where the variable cost per unit remains constant at a certain level.

step costs

A cost behavior that is fixed over a small range of activity then jumps to a different fixed level with moderate changes in volume. For example, states usually require day-care centers to limit the caregiver-to-child ratio to 1:7 there must be one caregiver for every seven children.

curvilinear costs

A cost behavior that is not linear (not a straight line)

account analysis

A method for determining cost behavior that is based on a manager’s judgment in classifying each general ledger account as a variable, fixed, or mixed cost.

scatterplot

A graph that plots historical cost and volume data

outliers

Abnormal data points; data points that do not fall in the same general pattern as the other data points.

high-low method

A method for determining cost behavior that is based on two historical data points: the highest and lowest volume of activity

Regression analysis

A statistical procedure for determining the line and associated cost equation that best fits all of the data points in the data set, not just the high-volume and low-volume data points.

R-squared

technically known as the coefficient of determination and commonly called the goodness-of-fit statistic, this statistic indicates how well the regression line fits the data points. More specifically, it indicates the percentage of the variance in the dependent variable (y) that is predictable from the independent variable (x).

absorption costing

The costing method where products “absorb” both fixed and variable manufacturing costs.

variable costing

The costing method that assigns only variable manufacturing costs to products. All fixed manufacturing costs (fixed MOH) are expensed as period costs. Also known as direct costing.

cost-volume-profit analysis (CVP)

expresses the relationships among costs, volume, and the company’s profit or loss.

contribution margin income statement

Income statement that organizes costs by behavior (variable costs or fixed costs) rather than by function

contribution margin

sales revenue minus variable expenses

simple linear regression

A regression analysis that includes only one x-variable

independent variable

the x variable used in a regression analysis. Also referred to as an explanatory variable or predictor variable.

dependent variable

the y variable in a regression analysis, also referred to as the outcome variable

multiple regression

a regression analysis that contains more than one independent variable to predict a dependent variable

adjusted r squared

A statistical measure used to assess the predictability of a multiple regression model. The measure ocmpensates for each additional variable in the model and will only increase if the additional independent variable improves the model by more than would be expected by chance.

constraint

A factor that restricts the production or sale of a product

sales mix

the combination of products that make up total sales

contribution margin per unit

The excess of the selling price per unit over the variable cost per unit. Tells managers how much profit they make of each unit before considering fixed costs. Also known as unit contribution margin.

contribution margin ratio

ratio of contribution margin to sales revenue

breakeven point

The sales level at which operating income is zero: Total revenues = Total expenses

target profit

The profit goal that managers are aiming to achieve.

sensitivity analysis

A “what if” technique that asks what results will be if actual prices of costs change or if an underlying assumption such as sales mix changes. For example, increased competition may force Kay to consider lowering her sales price. In addition, her suppliers may increase the cost of posters.

margin of safety

Excess of actual or expected sales over the sales needed to break even. This is the “cushion,” or drop in sales, the company can absorb without incurring a loss.

operating leverage

The relative amount of fixed and variable costs that make up for a firms total costs

operating leverage factor

At a given level of sales, indicates the percentage change in operating income that will occur from a 1% change in sales volume. In other words, it tells us how responsive a company’s operating income is to changes in sales volume.

indifference point

the volume of sales at which a company would be indifferent between alternative cost structures because they would result in the same total cost.

relevant information

Expected future data that differ among alternatives. Has two characteristics: It pertains to the future and it differs among alternatives.

scenario analysis

The process of experimenting with different scenarios to see what would happen to company profits under those conditions. Three scenarios are frequently examined: base case, best case, and worst case.

sunk costs

A past cost that cannot be changed regardless of which future action is taken.

cost-plus pricing

An approch to pricing used by price-setters; cost-plus pricing begins with the product’s total costs and adds the company’s desired profit to determine a cost-plus price.

target costing

an approach to pricing used by price-takers; target costing begins with the revenue at market price and subtracts the company’s desired profit to determine the product’s target total cost.

product line income statement

An income statement that shows the operating income of each product line as well as the company as a whole

avoidable fixed costs

Fixed costs that can be eliminated as a result of taking a particular course of action. They will be incurred only if the product line is retained if the product line is discontinued, these costs will go away.

unavoidable fixed costs

fixed costs that will continue to be incurred if a particular course of action is taken (even if the product line is discontinued).

common fixed expenses

expenses that cannot be traced directly to a product line

segment margin

The income resulting from subtracting only the direct fixed costs of a product line from its contribution margin. The segment margin contains no allocation of common fixed costs

r squared

technically known as the coefficient of determination and commonly called the goodness-of-fit statistic, this statistic indicates how well the regression line fits the data points. More specifically, it indicates the percentage of the variance in the dependent variable (y) that is predictable from the independent variable (x).

cost-volume-profit (CVP) Analysis

Expresses the relationships among costs, volume, and profit or loss.

contract manufacturers

manufacturers that make products for other companies, not for themselves.

cost plus pricing

an approach to pricing used by price-setters; cost-plus pricing begins with the product’s total costs and adds the company’s desired profit to determine a cost-plus price.

descriptive analytics

analytics that describe what has happened or what is happening

diagnostic analytics

analytics that help uncover the root cause of the current state.

offshoring

Having work performed overseas. Offshored work can be performed either by the company itself or by outsourcing the work to another company.

opportunity cost

having benefit forgone by choosing a particular alternative course of action.

outsourcing

contracting an outside company to produce a product or perform a service. Outsourced work can be done domestically or overseas.

predictive analytics

analytics that seek to forecast what will happen in the future.

prescriptive analytics

Analytics that seek to determine what should be done.

product line income statement

an income statement that shows the operating income of each product line as well as the company as a whole.

relevant information

expected future data that differ among alternatives

segment margin

the income resulting from subtracting only the direct fixed costs of a product line from its contribution margin. The segment margin contains no allocation of common fixed costs.

segment margin income statement

A product line income statement that contains no allocation of common fixed costs. Only direct fixed costs that can be traced to a specific product lines are subtracted from the product line’s contribution margin. All common fixed costs remain unallocated and are shown only under the company total

sunk cost

A past cost that cannot be changed regardless of which future action is taken.

target costing

an approach to pricing used by price-takers; target costing begins with the revenue at market price and subtracts the company’s desired profit to arrive at the target total cost.

unavoidable fixed costs

fixed costs that will continue to be incurred even if a particular course of action is taken.