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

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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 ...

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