🏗️ Cost Structure & Allocation

Indirect costs (overhead) are pooled and allocated to cost objects using an allocation base (e.g., DLH, machine hours, revenue).

Overhead rate is: OH Rate = Total Overhead Pool ÷ Total Allocation Base.

Death spiral intuition: if you drop a cost object, the remaining objects may have to absorb the same overhead pool, increasing the overhead rate and making more objects look unprofitable.

This tab helps you classify costs as Fixed, Variable, or Mixed using quantitative methods.

High-Low method uses the highest and lowest activity periods to estimate VC/unit and FC.

Least squares regression fits a line: Total Cost = FC + (VC per unit × Activity).

Manipulation detection: watch for outliers, step costs, and changes outside the relevant range.

Unit cost (average cost) includes fixed costs spread over units. If volume changes, unit cost changes.

The trap is using a unit cost computed at one volume and multiplying by a different volume to estimate total cost.

Always reason in total dollars: Total Cost = FC + (VC/unit × Units).