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PAGE 28 Chapter 2 PAGE 29 Chapter 2 CHAPTER 2 COST TERMINOLOGY AND COST BEHAVIORS QUESTIONS 1. The term cost is used to refer to so many different concepts that an adjective must be attached to identify which particular type of cost is being discussed. For example, there are fixed costs, variable costs, period costs, product costs, expired costs, and opportunity costs, to name just a few. 2. A cost object is anything for which management wants to collect or accumulate costs. Before a cost can be specified as direct or indirect, the cost object must be identified. Since direct costs must be conveniently and economically traceable to the cost object, not knowing what the cost object in question is would make it impossible to identify direct costs. For example, if multiple products are made in the same production area, the salary of the area’s manager would be direct to the production area but indirect to the different products. Indirect costs must be allocated in some rational and systematic manner to the cost object. 3. The assumed range of activity that reflects the company’s normal operating range is referred to as the relevant range. Outside the relevant range, costs may be curvilinear because of purchase discounts, improved worker skill and productivity, worker crowding, loss in employee efficiency during overtime hours, etc. Although a curvilinear graph is more indicative of reality, it is not as easy to use in planning or controlling costs. Accordingly, accountants choose the range in which these fixed and variable costs are assumed to behave as they are defined (linear) and, as such, represent an approximation of reality. 4. It is not necessary for a causal relationship to exist between the cost predictor and the cost. All that is required is that there is a strong correlation between movement in the