(Excerpted from the 2010 Roger CPA Review BEC Textbook)
A primary purpose of cost measurement is to allocate the costs of production (direct materials, direct manufacturing labor, and manufacturing overhead) to the units produced. It also provides important information for management decisions, such as product pricing decisions.
y = A + Bx [ TC = Fixed + Var (X) ]
In this formula:
The y is equal to total cost and is referred to as the dependent variable since its amount is dependent on the other factors.
The x is equal to volume and is referred to as the independent variable since it can be increased or decreased at the company's discretion. This is also often referred to as the cost driver as the amount of costs incurred will be largely dependent on the volume of this variable.
The A is equal to fixed costs and remains constant at any volume as long as the company is operating within a given range of volume.
The B is equal to the variable cost per unit.
Note: Theses cost assumptions only remain valid within the Relevant Range.
Mixed cost (Semi-Variable Fixed and Variable Component)
High-Low Method This method computes the slope for the variable rate based on the highest and lowest observations. The difference in cost is divided by the difference in activity to obtain the variable cost.