Cost-Based Decision Analysis

Question 1

Effective Cost Analysis must address two basic challenges

Answer 1

1. ) Understand how the allocation of key overhead costs shapes the full cost and the unit cost of a public service.
2. ) Determine the break even rate for a public good or service once the full cost is known.

Question 2

Are there national or uniform standard practices for cost allocation?

Answer 2

No

Question 3

Three fundamental points about how public managers make decisions informed by good cost analysis

Answer 3

1. ) The full cost of a public service depends in large part on how we assign it overhead and indirect cost.
2. ) There no national or uniform standard practices for cost allocation.
   a. ) So public managers can allocate across cost centers however they like.
3. ) small changes in cost accounting procedures can fundamentally alter how we think about important policy decisions.

Question 4

allocation basis

Answer 4

this is a metric or denominator that identifies where and how indirect costs are incurred.

Question 5

Cost Driver

Answer 5

• some factor or factors that affect the level of indirect costs incurred
• a good cost driver is a reliably observable quantity that shares a consistent relationship with the indirect cost in question

Question 6

Break Even Quantity Formula

Answer 6

(Fixed Costs) / (Price - Variable Costs)