Final answer:
To calculate the cost allocation rate for each activity, one must first determine the firm's cost structure, which includes fixed and variable costs.
Step-by-step explanation:
The cost allocation rate for each activity is computed by dividing the total cost by the quantity of the output. In business, this involves first determining the cost structure of the firm, which includes the total fixed costs and variable costs, and then following the formulas for total cost, average variable cost (AVC), average total cost (ATC), and marginal cost (MC). These concepts are critical in understanding the relationship between production and costs, as well as evaluating patterns of costs to determine potential profit.
To compute the cost allocation rate, use the formula: Cost Allocation Rate = Total Cost / Quantity. Total Cost is the sum of Fixed Costs and Variable Costs. Once the rate is determined, you can allocate costs to different activities accordingly, which helps in analyzing short-run costs and calculating average profit.
During the design process in engineering and other fields, these cost allocation rates help in estimating the costs for various solutions and making comparisons more manageable. For instance, costs may be normalized to evaluate cost per thousand gallons of water in environmental projects.