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The document discusses methods for segregating mixed costs, including the Scattergraph Method, High-Low Method, and Least Squares Method, each with varying levels of accuracy and application. It also explains key concepts such as the cost equation Y = a + bx, correlation analysis, and the coefficient of determination. The importance of selecting appropriate cost drivers and understanding their relationships to costs is emphasized for effective cost management.

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Ashryle Salazar
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11 views1 page

asas

The document discusses methods for segregating mixed costs, including the Scattergraph Method, High-Low Method, and Least Squares Method, each with varying levels of accuracy and application. It also explains key concepts such as the cost equation Y = a + bx, correlation analysis, and the coefficient of determination. The importance of selecting appropriate cost drivers and understanding their relationships to costs is emphasized for effective cost management.

Uploaded by

Ashryle Salazar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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- if activity level under consideration is outside relevant 𝒏 ∑𝒙𝒚 − (∑𝒙)(∑𝒚)

𝒃=
range, current cost equation is inapplicable. 𝒏 ∑𝒙𝟐 − (∑𝒙)𝟐

➢ Y = a + bx ̅−𝒃𝒙
𝒂= 𝒚 ̅

Cost Management Mathematics or


Y Total mixed cost Dependent variable
a Fixed cost Y - Intercept ∑𝒚 = 𝒏 𝒂 + 𝒃 ∑𝒙 to get b
b VCu Slope
x Cost driver Independent Variable CORRELATION ANALYSIS

- field of statistics focuses on testing relationships


➢ bx is the “Total variable cost” + (a) fixed = Mixed costs between quantitative variables (dependent and
independent).
- to predict future behavior.

METHODS IN SEGREGATING MIXED COSTS Coefficient of correlation (r)

1. Scattergraph Method - (Pearson’s correlation coefficient)


- visual fit method - Results of “r” extend from -1 to +1:
- plotting activity level along x-axis and
corresponding total cost along y axis. x and y relationship
- regression line represents relationship between Positive Direct
Negative Inverse
various data points.
Zero No relationship
- shall use linearity assumption, forms strict
relationship between cost and cost driver w/in
relevant range.
- best in detecting outliers and showing non-linear
patterns.
- only shows estimate and not the real cost,
employs judgement. (non-statistical)

Coefficient of determination (r^2)

- squaring value of r.
- represents percentage of total variation in the
dependent variable.
- results extend from 0 to +1.
- close to +1 means cost driver is highly related to the
dependent variable.

Standard Error of Estimate

- measure of variation of an observation made around


2. High-Low Method
the computed regression line since estimated values
- utilizes only two points, highest and lowest.
using regression equation came from estimation and
- least accurate method.
may differ from actual costs.
- change in costs is attributable to change in
- a measure of accuracy of predictions.
variable costs while fixed costs are constant.
- If r^2 = 1 means perfect correlation, standard error of
- no cost estimation, information generated
estimate is zero.
internally.
- choose cost driver w/highest r^2.
- also estimates and uses extreme data points.

𝑯𝑰 𝒄𝒐𝒔𝒕 − 𝑳𝑶 𝒄𝒐𝒔𝒕 CHAPTER 3: COST-VOLUME PROFIT (CVP)


𝑽𝑪𝒖 = ANALYSIS
𝑯𝑰 𝑼 − 𝑳𝑶 𝑼

𝑭𝑪 = 𝑯𝑰 𝒄𝒐𝒔𝒕 − (𝑽𝑪𝒖 𝒙 𝑯𝑰 𝑼)

𝑭𝑪 = 𝑳𝑶 𝒄𝒐𝒔𝒕 − (𝑽𝑪𝒖 𝒙 𝑳𝑶 𝑼)

3. Least Squares Method


- linear regression analysis
- most accurate (statistical)
- two variables independent and dependent.
- incorporates all data
- susceptible to outliers

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