Chapter 3: Cost Behavior HIGH-LOW METHOD analyzes a mixed

cost by first selecting two observation points in

Costs can also be classified as either PRODUCT a data set: the highest and lowest levels of
or PERIOD COSTS. activity.

PRODUCT COSTS are related to Chapter 4: Activity-Based Costing

making or acquiring the products or
providing the services that directly generate PREDETERMINED OVERHEAD RATE (or
the revenues of an entity. Product costs are overhead application rate) is a budgeted and
also called INVENTORIABLE COSTS. constant charge per unit of activity that is used
to assign overhead cost from an Overhead
Includes: Control account to Work in Process Inventory
for the period’s production or services.
Direct Material includes raw materials,
purchased components from contract
manufacturers, and manufactured
subassemblies.

Direct Labor refers to the time spent by

individuals who work specifically on
manufacturing a product or performing a
service.

Overhead refers to any factory or production

cost that is indirect to the product or service
and, accordingly, does not include direct
material and direct labor.

Conversion Cost is the SUM of Direct

Labor and Overhead Costs.

PERIOD COSTS are related to other

business functions such as selling and
administration.

DISTRIBUTION COST is any cost

incurred to warehouse, transport, or deliver a
product or service. Distribution costs are
expensed as incurred.

VARIABLE COST i s a cost that varies in

total in direct proportion to changes in activity
is a variable cost

FIXED COST is the cost that remains

constant in total.

MIXED COST has both a variable and a

fixed component.

STEP COST can be variable or fixed. Step

variable costs have small steps and step fixed
costs have large steps.