1 Cost Behavior and Estimation Free Online FlashCards

What does cost behavior describe?

Cost behavior describes how a cost changes as the level of activity changes.

What is an activity base?

The activity base, or cost driver, is the measure that causes a cost to change, such as units produced or machine-hours.

What is the relevant range?

The relevant range is the activity band within which assumptions about a cost remain reasonable for a specified period.

How does a variable cost behave within the relevant range?

Within the relevant range, total variable cost changes with activity, while variable cost per unit stays constant.

How does a fixed cost behave within the relevant range?

Within the relevant range, total fixed cost stays constant, while fixed cost per unit falls as activity rises.

What defines a mixed cost?

A mixed cost contains fixed and variable components. It can be modeled as $Y = a + bX$, where $a$ is fixed cost and $b$ is variable cost per activity unit.

What is a step cost?

A step cost stays constant across an activity band, then jumps when activity exceeds available capacity.

What makes a cost direct?

A direct cost can be conveniently and economically traced to a particular cost object.

What makes a cost indirect?

An indirect cost cannot be conveniently traced to a specific cost object, so it is allocated instead.

Why can a cost be direct to one cost object but indirect to another?

Traceability depends on the cost object: a department manager’s salary can be direct to the department but indirect to each product.

Are direct costs always variable and indirect costs always fixed?

Cost behavior and traceability are separate classifications. For example, a cost can be fixed and direct, or variable and indirect.

Which observations does the high-low method use?

Choose the observations with the highest and lowest activity, then use their associated costs. They need not have the highest and lowest total costs.