Cost Measurement & Assignment

Question 1

Cost Drivers

Answer 1

Units represent volume of cost driver
• Cost driver can be any variable that has greatest influence on cost
• Examples include volume of production, hours worked, miles driven, or machine hours

Question 2

High-Low Method

Answer 2

Four steps in estimating variable cost per unit and total fixed costs
1. Highest volume Total cost # of units
Lowest volume Total cost # of units
Difference Cost # of units
2. Variable cost per unit = Difference in cost ÷ Difference in # of units
3. Total variable costs (at either level) = Variable cost per unit × # of units
4. Fixed costs (at either level) = Total costs – Total variable costs

Question 3

Calculating Total Costs

Answer 3

Total costs = Fixed costs + Variable costs
y = a + bx
y = Total cost (dependent variable)
a = Total fixed costs
b = Variable cost per unit
x = # of units (independent variable)