Account analysis  A method for analyzing cost behavior in which each account under consideration is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves.




Activity base  A measure of whatever causes the incurrence of a variable cost. For example, the total cost of Xray film in a hospital will increase as the number of Xrays taken increases. Therefore, the number of Xrays is an activity base that explains the total cost of Xray film.




Committed fixed costs  Those fixed costs that are difficult to adjust and that relate to investment in facilities, equipment, and basic organizational structure.




Contribution approach  An income statement format that is geared to cost behavior in that costs are separated into variable and fixed categories rather than being separated according to the functions of production, sales, and administration.




Contribution margin  The amount remaining from sales revenues after all variable expenses have been deducted.




Cost structure  The relative proportion of fixed, variable, and mixed costs found within an organization.




Curvilinear costs  A relationship between cost and activity that is a curve rather than a straight line.




Dependent variable  A variable that responds to some causal factor; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX.




Discretionary fixed costs  Those fixed costs that arise from annual decisions by management to spend in certain fixed cost areas, such as advertising and research.




Engineering approach  A detailed analysis of cost behavior based on an industrial engineer's evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs.




Highlow method  A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels.




Independent variable  A variable that acts as a causal factor; activity is the independent variable, as represented by the letter X, in the equation Y = a + bX.




Leastsquares regression method  A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimizes the sum of the squared errors.




Linear cost behavior  Cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity.




Mixed cost  A cost that contains both variable and fixed cost elements.




Multiple regression  An analytical method required in those situations where variations in a dependent variable are caused by more than one factor.




R2  A measure of goodness of fit in leastsquares regression analysis. It is the percentage of the variation in the dependent variable that is explained by variation in the independent variable.




Relevant range  The range of activity within which assumptions about variable and fixed cost behavior are valid.




Stepvariable cost  The cost of a resource (such as a maintenance worker) that is obtainable only in large chunks and that increases and decreases only in response to fairly wide changes in the activity level.
