Analysis of Cost Behavior and Cost Segregation Methods

What are variable costs?

Costs that vary in total in direct proportion to changes in activity level, while the variable cost per unit remains constant. Examples include direct materials, direct labor, and sales commissions.

What are fixed costs?

Costs that remain constant in total regardless of changes in activity level, although per unit fixed cost declines as activity level changes. Examples include rent, insurance, and straight-line depreciation.

What are mixed costs or semi-variable costs?

Costs that vary in total but not in proportion to changes in activity level, consisting of both a fixed and a variable portion. An example is electricity.

What are step costs?

Costs that behave differently at various levels of activity, appearing as steps on a graph where total cost is plotted against activity level.

What is a step variable cost?

A cost that generally varies with the level of activity but is incurred at discrete points, resulting in large changes in amounts. An example is the cost of hiring additional quality assurance workers.

What is a step fixed cost?

A cost that remains unchanged within certain activity thresholds but changes when those thresholds are breached. Examples include costs associated with starting a new production shift or facility.

What is the High-Low Points Method?

A method to segregate fixed and variable elements of mixed costs using the highest and lowest activity levels to compute costs.

What is the Statistical Scatter Graph Method?

A method where costs are plotted against activity levels on a graph to determine fixed and variable costs by drawing a line of best fit.

What is the Method of Least Squares (Regression Analysis)?

A statistical method that determines a linear regression line through plotted points to minimize the sum of squared deviations from the line.

What does the Relevant Range Assumption refer to?

The range of activity within which identified cost behavior patterns are valid, beyond which cost behaviors may change.

What does the Time Period Assumption imply?

Cost behavior patterns are valid only over a specified period; beyond this, costs may exhibit different behaviors.

What is an advantage of the High-Low Method?

Its ease of calculation, requiring only total production and total mixed cost without complex data.

What is a disadvantage of the High-Low Method?

It only considers the highest and lowest figures, potentially leading to inaccuracies when applied to the rest of the year.

Give an example of a step fixed cost.

The cost of starting a new production shift, which includes utilities and salaries of shift supervisors.

What is an example of a step variable cost?

The compensation of a quality assurance worker, which increases when production exceeds a certain volume.

What happens to per unit fixed cost as activity level changes?

Per unit fixed cost declines as the level of activity increases.

How do mixed costs behave?

They vary in total but not in direct proportion to changes in activity level.

What is the primary focus of the analysis of cost behavior?

Understanding how costs change in relation to changes in activity levels.

What are some examples of variable costs?

Direct materials, direct labor, and sales commissions.

What types of costs can be analyzed using the High-Low Method?

Mixed costs, which contain both fixed and variable components.

What is the significance of identifying cost behavior patterns?

It helps in budgeting, forecasting, and decision-making regarding pricing and production.

Why might costs behave differently outside the relevant range?

Because the assumptions about cost behavior may no longer hold true at different levels of activity.

What is a common application of step fixed costs?

Deciding whether to invest in capital projects.