ABSORPTION COSTING

• Absorption costing


  – a costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs. It assigns all manufacturing costs to the product and includes direct materials, direct labor, variable overhead, and fixed overhead.
• Committed fixed costs


  a fixed cost that cannot be easily changed. Examples include investments in assets such as buildings and equipment, real estate taxes, insurance expense and some top-level manager salaries.
• Cost behavior


  the way in which a cost changes when the level of output changes.
• Cost driver


  – a causal factor that measures the output of the activity that leads (or causes) costs to change
• Dependent variable


  a variable whose value depends on the value of another variable. Example is electricity based on machine hours which is an independent cost
• Discretionary fixed costs 


  fixed costs that can be changed relatively easily in the short run at management discretion. Examples include advertising, machinery maintenance, and research and development (R&D) expenditures.
• Fixed costs 


  costs that, in total, are constant within the relevant range as the level of output.
• High-low method


  a method for separating mixed costs into fixed and variable components by using just the high and low data points. [Note: The high (low) data point corresponds to the high (low) output level.]
• Independent variable


  explains changes in the dependent variable and, as such, its value does not depend on the value of another variable. Example are direct materials and direct labor
• Mixed costs


  costs that have both a fixed and a variable component
• Relevant range 


  the range of output over which an assumed cost relationship is valid for the normal operations of a firm.
• Semi-variable costs


  a cost that is variable in nature but whose rate of change is not constant (i.e., total cost increases at either a decreasing or an increasing rate) as output increases.
• Step cost


  a cost that displays a constant level of total cost for a range of output and then jumps to a higher level of total cost at some point, where it remains for a similar range of output. Example: salary of supervisor for every 10 laborers.
• Variable costing


  – costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs. It assigns all variable manufacturing costs to the product and includes direct materials, direct labor, and variable overhead
• Variable costs


  costs that, in total, vary in direct proportion to changes in output within the relevant range.