Nature and Classification of Costs

Which of the following accurately describes a direct cost?

What distinguishes variable costs from fixed costs?

Which statement correctly defines a mixed cost?

What is the total cost formula used for mixed costs?

Which type of cost is a supervisor's wages categorized as in a growing workforce scenario?

Which of the following costs would be classified as an expired cost?

Which factor classify a cost as a period cost rather than a product cost?

A telephone bill consisting of a fixed line rental and a variable cost per call is an example of which type of cost?

What is the first step in applying the high-low method?

What is a major limitation of the high-low method?

In the equation $y = a + bx$, what does the variable 'b' represent?

What assumption does the high-low method make regarding costs?

Which of the following best describes linear regression analysis?

What is depicted by the equation $y = P5,000 + 10x$?

Why is the high-low method considered easy to use?

What does the least squares technique in linear regression aim to minimize?

Nature and Classification of Costs

Direct Costs: Traceable to a specific cost object (e.g., raw materials used in a product).
Indirect Costs: Cannot be directly traced to a cost object and must be allocated (e.g., factory rent).
Variable Costs: Costs that change in total with changes in activity levels (e.g., direct labor costs).
Fixed Costs: Costs remain constant within a relevant range of activity levels (e.g., rent).
Mixed Costs: Costs with both fixed and variable components.
Step Costs: Costs increase in distinct steps based on activity levels (e.g., warehouse space).

Separating Mixed Costs

High-Low Method: A simple approach to separating mixed costs using the highest and lowest activity levels.
- Steps: Identify highest and lowest activity levels, calculate variable cost per unit, use either high or low activity level to calculate fixed cost, use calculated values to estimate costs at different activity levels.
- Assumptions: Changes in cost are solely driven by activity changes, cost has both fixed and variable components, a linear relationship exists between cost and activity levels.
- Advantages: Easy to understand and implement.
- Limitations: Relies on historical data, assumes activity is the only factor impacting cost, uses only two data points, ignores potential discounts for larger quantities.
Linear Regression Analysis: A statistical technique that establishes a linear relationship between dependent and independent variables to separate fixed and variable costs.
- Equation: y = a + bx, where y is the total cost, x is the activity level, a is the fixed cost, and b is the variable cost per unit.
- Method: Determines the "line of best fit" by minimizing the deviations from the regression line.
- Benefits: More robust than the high-low method as it considers all data points.
- Drawbacks: Requires statistical software, can be complex to understand and utilize.

This quiz covers the different types of costs, including direct, indirect, variable, fixed, mixed, and step costs. Additionally, it explores methods for separating mixed costs, such as the high-low method, providing a practical approach to cost management. Test your understanding of these essential concepts in cost accounting.