Define Opportunity Cost.

Define Opportunity Cost.

The contribution to income that is forgone (rejected) by not using a limited resource in its next-best alternative use.

Can the constant in the cost function be used as an estimate for fixed cost (when calculating maintenance, etc.)?

Can the constant in the cost function be used as an estimate for fixed cost (when calculating maintenance, etc.)?

The cost function is an estimate of how costs behave within the relevant range, not at cost levels outside the relevant range.

Describe the account analysis method for estimating a cost function.

Describe the account analysis method for estimating a cost function.

It estimates cost functions by classifying cost accounts in the subsidiary ledger as variable, fixed or mixed with respect to the identified level of activity. Typically, managers use qualitative, rather than quantitative, analysis when making these cost-classification decisions.

Name 4 approaches to estimating a cost function ?

Name 4 approaches to estimating a cost function ?

1. Industrial engineering method
2. Conference method
3. Account analysis method
4. Quantitative analysis of current or past cost relationships

Describe three alternative linear cost functions ?

Describe three alternative linear cost functions ?

1. Variable Cost Function: A cost function in which total costs change in proportion to the changes in the level of activity in the relevant range.

2. Fixed Cost Function: A cost function in which total costs do not change with the changes in the level of activity in the relevant range.

3. Mixed Cost Function: A cost function that has both variable and fixed elements. Total costs change but not in proportion to the changes in the level of activity in the relevant range.

What two assumptions are frequently made when estimating a cost function?

What two assumptions are frequently made when estimating a cost function?

1. Variations in the level of a single activity (the cost driver) explain the variations in the related total cost

2. Cost behavior is approximated by a linear cost function within the relevant range. A linear cost function is a cost function where, within the relevant range, the graph of total costs versus the level of a single activity forms a straight line.

Define Cost-Volume-Profit Analysis ?

Define Cost-Volume-Profit Analysis ?

CVP analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, selling price, variable cost per unit, or fixed costs of a product.

Define Operating Leverage ?

Define Operating Leverage ?

The effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin.