Chapter 2 Vocabulary

Cost Behavior

The way total costs change in response to changes in the level of activity.

Variable Cost

Any cost whose total varies in proportion to a business activity. Variable cost per unit is constant over the relevant range.

Activity

An event that consumes resources; any repetitive event that serves as a measure of output or usage, such as sales, production, phone calls made, or miles driven.

Fixed Cost

A cost that does not change in total with changes in activity, but per unit cost varies indirectly with changes in activity.

Discretionary Fixed Cost

Fixed costs that can be changed over the short run.

Committed fixed cost

Fixed costs that cannot be changed over the short run.

Step cost

Costs that are fixed over only a small range of activity. Once that level of activity has been exceeded, total costs increase and remain constant over another small range of activity.

Mixed cost

A cost that has both fixed and variable components.

Scattergraph

A graph of individual data points showing total costs in relation to volume, or activity level.

regressional analysis

A statistical technique that separates a mixed cost into its fixed and variable components by identifying the line of best fit for the points in a data set.

Relevant Range

The normal or expected range of operating activity.

cost

The cash or other value given up to obtain goods or services with the expectation that they will generate future benefits.

Expense

An expired, or used up, cost.

Operating income formula

(sales price per unit X # of units sold) - (variable cost x # units sold) - fixed expense

or

((Sales price per unit - variable cost ) x # units sold) - fixed expenses

contribution margin

The difference between sales and variable costs—the amount that remains to cover fixed costs and provide a profit.

Contribution margin ratio

Contribution margin divided by sales.

Contribution format income statement

An income statement that classifies costs by behavior.

Variable cost ratio

Total variable costs divided by total sales.