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# 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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