Wiley CPAexcel Exam Review 2014 Focus Notes: Business Environment and Concepts

Focus on: Cost Measurement and Assignment—Module 46

COST MEASUREMENT AND ASSIGNMENT

Cost Estimation

Calculating Total Costs

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)

Various methods are used to determine the variable cost per unit and total fixed costs

Cost Drivers

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

High-Low Method

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

Regression Analysis

Coefficient of correlation (R) indicates relationship between dependent and independent variable:

• R = 1	Strong direct relationship
• 1 > R > 0	Direct relationship, not as strong
• R = 0	No relationship
• 0 > R > −1	Indirect relationship, not as strong
• R = −1	Strong indirect relationship

Company will use cost driver with strongest direct or indirect relationship

Cost Classifications

Product and Period Costs

Product	Period
Direct materials ...