CH 2 Cost Behavior

Fixed Costs

Costs that remain constant regardless of the number of units sold.

Variable Costs

Costs that increase in direct proportion to the number of units sold.

Mixed Costs

Costs that contain both fixed and variable components.

Relevant Range

The range of activity within which cost behavior assumptions are valid.

Operating Leverage

A measure of the extent to which fixed costs are used in a business.

Profit Stability

The stability of profits is influenced by the level of fixed costs within a company.

Magnitude of Operating Leverage

The impact of sales changes on profitability, calculated as Contribution margin divided by Net income.

Cost Averaging

The average cost per unit decreases as production increases.

High-Low Method

A method used to estimate variable and fixed costs using the highest and lowest activity levels.

Regression Analysis

A statistical method that uses all data points to estimate fixed and variable costs.

Multiple Regression

A method that considers multiple independent variables to increase the accuracy of cost estimates.