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Mixed Cost Separation: Approaches

The document describes two methods, the high-low method and least-square regression model, for separating mixed costs into variable and fixed components. It provides an example using data on a company's monthly overhead costs and units produced to calculate the per unit variable cost and total fixed cost for each method. Both methods determine the per unit variable cost to be 25 and the total fixed cost to be 5,000.

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muhsin
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171 views

Mixed Cost Separation: Approaches

The document describes two methods, the high-low method and least-square regression model, for separating mixed costs into variable and fixed components. It provides an example using data on a company's monthly overhead costs and units produced to calculate the per unit variable cost and total fixed cost for each method. Both methods determine the per unit variable cost to be 25 and the total fixed cost to be 5,000.

Uploaded by

muhsin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Mixed Cost Separation

Approaches:
1. Scatter diagram
2. Account analysis
3. Engineering approach
4. High-low method
5. Least-square regression model

Example:
Barilgaon Company’s total overhead costs at various activity levels are presented below:
Month Units produced Total overhead cost

January 320 Tk. 13,000

February 270 11,750

March 400 15,000

April 380 14,500

May 450 16,250

June 500 17,500

Required:
a) Separate the above cost into variable and fixed elements using high-low method and
least-square regression model.
b) Determine the cost of producing 550 units in July using both models.

High-Low Method:
Per unit variable cost = (High cost – Low cost)/(High activity – Low activity)

= (17,500 – 11,750)/(500 – 270)

= 5,750/230

= 25
Total fixed Cost = Total cost – Total variable cost

= 13,000 - 320×25

= 5,000

Cost of July = 5,000 + 550×25


= 18,750
Least-Square Regression Model:

Units
Month Cost (y) xy x2
(x)
January 320 13,000 4160000 102400
Februar
270 11,750 3172500 72900
y
March 400 15,000 6000000 160000
April 380 14,500 5510000 144400
May 450 16,250 7312500 202500
June 500 17,500 8750000 250000
3490500
 Total 2320 88,000 932200
0

Per unit variable cost, b = (n∑xy - ∑x*∑y)/{n∑x2- (∑x)2}

= (6×34,905,000 – 2,320×88,000)/{6×932,200 – (2,320)2}

= (209,430,000 – 204,160,000)/(5,593,200 – 5382400)

= 5,270,000/210,800

= 25

Fixed cost, a = (∑y - b∑x)/n

= (88,000 - 25×2,320)/6

= (88,000 – 58,000)/6

= 30,000/6

= 5,000

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