Chapter 5

Fixed Costs: costs that remain the same in total, but vary per unit when production volume changes (do vary on a per unit basis).   Examples include rent, salary of a plant manager, insurance, taxes, and depreciation.

Variable costs: vary in direct proportion to changes in production volume but are fixed when expressed as per unit amounts.   As production increases, variable costs increase in direct proportion to the change in volume.

Step costs: costs that vary with activity in steps and may look like and be treated as either variable costs or fixed costs; step costs are not technically fixed costs, but may be treated as such if they remain constant within a relevant range of production

Mixed costs: Costs that include both a fixed and variable component, making it difficult to predict the behavior of a mixed costs as production changes unless the cost is first separated into its fixed and variable components

Regression Analysis: uses statistical methods to fit a cost line (regression line) through a number of data points.   Regression analysis statistically finds the line that minimizes the sum of the squared distance from each data point to the line.

R square: a measure of goodness of fit (how well the regression line fits the data);   The proportion of dependent variable variation that is explained by the by changes in the independent variable.   An R square of 1 indicates a perfect correlation between the dependent and independent variable.

High Low method

Change in cost / change in volume = variable cost per unit

Total Overhead costs = Fixed costs + (variable cost per unit)

Total Overhead costs  variable costs = fixed costs

In general, variable costs are relevant because vary with the level of production.   Fixed costs are not relevant because they typically don't change as production changes.

Taxes

After tax cost = Pretax cost x (1  tax rate)

After tax benefit = Pretax receipts x (1  tax rate)

After tax... [continues]

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