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Cost Behavior (p. 92)
How costs react to changes in production volume or other levels of activity.
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Fixed costs (p. 92)
Costs that remain the same in total when production volume increases or decreases but that very per unit.
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Variable costs (p. 93)
Costs that stay the same per unit, but change in total, as production volume increases or decreases. (direct material, direct labor, factory supplies, etc.)
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Relevant Range (p. 94)
The normal range of production that can be expected for a particular product and company.
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Step costs (p. 95)
Costs that vary with activity in steps and may look like and be treated as either variable costs or fixed costs; step costs are technically not fixed costs but may be treated as such if they remain constant within a relevant range of production
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The cost equation
The a in the equation is the point where the line intersects the vertical (y) axis (the y-intercept), and b is the slope of the line.
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Mixed Costs (p. 96)
Costs that include both a fixed and a variable component, making it difficult to predict the behavior of a mixed cost as production changes, unless the cost is first separated into fixed and variable components.
A cost that changes in total and also changes per unit is a mixed cost.
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Regression analysis (p. 97)
The procedure that uses statistical methods (least squares regression) to fit a cost line (called a regression line) through a number of data points.
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Dependent Variable (p. 98)
The variable in regression analysis that is dependent on changes in the independent variable.
The amount of cost is dependent on production. The y range will be used to identify the dependent variable
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Independent Variable (p. 98)
The variable in regression analysis that drives change in the dependent variable.
It drives the cost of the dependent variable.
X range for the independent variable.
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Multiple R (correlation coefficient) (p. 101)
Is a measure of the proximity of the data points to the regression line. In addition, the sign of the statistic (+ or -) tells us the direction of the correlation between the independent and dependent variables.
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R square (R2)
A measure of goodness of fit (how well the regression line "fits" the data)
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Variable cost per unit (p. 102)
As with the regression equation, the slope of the line is interpreted as the variable-cost component of the mixed cost
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Total overhead costs (p. 102)
Fixed costs + (Variable cost per unit * number of pizzas)
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Fixed costs (p. 102)
Total overhead costs - Variable cost
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After-tax cost (p. 103)
Pretax cost X (1-tax rate)
In this case, the impact of income taxes is to reduce the "real" cost of a tax-deductible expense to the business and to increase cash flow.
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After-tax benefit (p. 103)
Pretax receipts X (1-tax rate)
In this case, the impact of income taxes is to decrease cash flow to the business.
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After-tax income (p. 104)
Pretax income X (1-tax rate)
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Absorption (full) costing (p. 104)
A method of costing in which product costs include the costs of direct materials, direct labor, and fixed and variable overhead; required for external financial statements and for income tax reporting.
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Variable (direct) costing (p. 104)
A method of costing in which product costs include the cost of direct materials, direct labor, and variable overhead; fixed overhead is treated as period cost; variable costing is consistent with CVP's focus on cost behavior.
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