 1.Define and describe fixed, variable, and mixed costs.

o Variable costs change in total as activity usage changes.

o Usually, variable costs increase in direct proportion to increases in
activity output.
o Fixed costs do not change in total as activity output changes.
o Mixed costs have both a variable and a fixed component.
 2.Explain the use of resources and activities and their relationship to cost
behavior.
o Flexible resources are acquired as used and needed.

 Flexible resources have no excess capacity for these resources.

 They are usually considered to be variable costs.
o Committed resources are acquired in advance of usage.

 May have excess capacity

 Frequently considered fixed
o Step costs are acquired in lumpy amounts.

 Narrow steps approximated by a variable cost function

 Wide steps approximated as fixed
 3.Explain how several methods of cost estimation can be used.
o The industrial engineering method uses physical observation and
analysis to determine what activities in what amounts are needed to
complete a process.

 Time and motion studies may be used

 Typically expensive and seldom updated
o Account analysis requires the accountant to classify accounts as
either fixed or variable.

 Frequently used in practice

 Gives good results if accounts are primarily fixed costs or
variable costs
 Average account values and average driver values are used to
calculate fixed costs and variable rates
 4.Separate mixed costs into their fixed and variable components using the
high-low method, the scatterplot method, and the method of least squares.
o High-low method uses the high and the low data points to form a
straight line.
  Slope is variable rate.
 Intercept is fixed cost.
 Advantages: objective and easy
 Disadvantage: nonrepresentative high or low point leads to
misestimated cost function
o Scatterplot method plots data—two points chosen to determine a
line.

 Intercept is fixed cost.

 Slope is variable rate.
 Advantages: identify nonlinearity, outliers, shifts in the cost
relationship
 Disadvantage: subjectivity
o OLS (regression) produces a best-fitting line.
 5.Evaluate the reliability of the cost formula.
o Coefficient of correlation shows degree to which two variables move
together.

 Perfect positive correlation is 1.0.

 Perfect negative correlation is −1.0.
o Coefficient of determination  shows amount of cost variability
explained by driver.

 Often multiplied by 100 and used as percent
o Smaller standard errors of estimate indicate better goodness of fit.
 6.Explain how multiple regression can be used to assess cost behavior.
o Has two or more independent variables
o Useful when dependent variable is affected by more than one
independent variable
 7.Define the learning curve, and discuss its impact on cost behavior.
o Nonlinear relationship between labor hours and output.
o Doubling of output requires less than a doubling of labor time.
o Cumulative average-time learning curve assumes the cumulative
average time per unit decreases by a constant percentage, or
learning rate, each time the cumulative quantity of units produced
doubles.
o Incremental unit-time learning curve assumes the incremental unit
time decreases by a constant percentage each time the cumulative
quantity of units produced doubles.
 8.Discuss the use of managerial judgment in determining cost behavior.
o Used alone or in conjunction with the high-low, scatterplot, or least-
squares methods
o Experienced managers use knowledge of cost and activity-level
relationships to:

 Identify outliers
 Understand structural shifts
 Adjust parameters due to anticipated changing conditions