# HCA/270 ± Week Six ± Test: Cost Behavior 1.

Define or explain: Direct Allocation Method- cost allocation method that allocates the costs of each cost center directly to the revenue centers, without any intermediate allocations to other cost centers. Step Down Allocation Method- cost allocation method that allocates cost from the cost centers to revenue centers with intermediate steps, and that closes cost centers as soon as all costs have been allocated from them. Double Distribution Allocation Method- cost allocation method that allocates cost from cost centers to revenue centers with intermediate steps as in the step-down method, but that does not close cost centers until the second round of cost allocations. Reciprocal Cost Allocation Method- cost allocation method that allocates costs to revenue centers via flows that run both from cost center to revenue center and from revenue center to cost center. 2. What is allocation criterion? Give one example of allocation criterion. Allocation criterion is the rule for how to divide the costs of Center A among the centers it serves. An example of allocation criterion would be: the cost of rent and utilities being divided among the other cost centers on the basis of the amount of square footage that each cost center uses. 3. Define Activity Based Costing. A cost accounting system that identifies cost drivers, activities that produce costs, and allocates indirect costs on the basis of associated cost drivers. 4. How has activity based costing improved cost analysis? Explain. Activity based costing has improved cost analysis by distributing the costs to the drivers that use the most resources or services. Thereby; distributing the costs more fairly to the services, not the center. The older method distributed costs equally to services in a center, sometimes over or underestimating the costs of some services. 5. Define or explain: High-Low Method- a technique used to split a mixed cost into its fixed and variable components. Two extreme data points, a high and a low, are taken from a set of data, and used to calculate the approximate variable cost per unit. Least Squares Regression Analysis- This is also a technique to separate fixed and variable costs. This technique mathematically calculates the y-intercept and the slope of the straight line that ideally sets through a set of points on a graph. It is achieved by minimizing the sum of squares of the distances between the line and all the points on the graph, using the equation y = a + bx.