Key Concepts + Formulas

Question 1

Steps of cost allocation methods

Answer 1

1) Identify the cost objects
2) Determine the cost pools
3) Select a cost allocation rule

Question 2

Cost allocation methods

Answer 2

50/50, revenue based, # of employees, measure usage, # of locations

Question 3

Special order - reject or accept?

Answer 3

1) Compare status quo and alternative
2) Check for capacity
3) Is the value of one better than the other?

Question 4

High low-cost estimation

Answer 4

• Refers to designated activity
• FORMULA: (Costs at high activity level - costs at low activity level)/(Highest act. level - lowest act. level)
• Flaw - results can easily be affected by unexpected events

Question 5

How to get fixed cost in High-low cost estimation

Answer 5

1) Rearrange TC = VC + FC to FC = TC - VC
2) Choose either high or low (ex: we pick high)
3) Highest Cost - (Var. cost per unit x highest volume level)

Question 6

Breakeven analysis (unit)

Answer 6

Fixed costs/Unit contribution margin

Question 7

Breakeven analysis (volume in sales dollars)

Answer 7

Fixed costs/Contribution margin ratio

Question 8

Target profit analysis (units)

Answer 8

Fixed costs + target profit/Unit contribution margin

Question 9

Target profit analysis (volume in sales dollars)

Answer 9

Fixed costs + target profit/Contribution margin ratio

Question 10

Total cost formula

Answer 10

Total costs = (Variable costs per unit x Units of output) + Fixed costs

TC = VX + F