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10.methods of Cost Variability

This document discusses various methods for segregating semi-variable costs into fixed and variable components. It describes the comparison method, high-low point method, average method, equation method, least squares method, graphical method using a scatter diagram, and analytical method. The graphical method uses a scatter plot to determine a line of best fit distinguishing the fixed cost intercept on the y-axis and variable slope. The document provides examples and equations to demonstrate how to apply each method.

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Neel Gupta
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473 views

10.methods of Cost Variability

This document discusses various methods for segregating semi-variable costs into fixed and variable components. It describes the comparison method, high-low point method, average method, equation method, least squares method, graphical method using a scatter diagram, and analytical method. The graphical method uses a scatter plot to determine a line of best fit distinguishing the fixed cost intercept on the y-axis and variable slope. The document provides examples and equations to demonstrate how to apply each method.

Uploaded by

Neel Gupta
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Methods of Cost Variability

By

RAHUL SINGH MBA-IB Roll No : 49

Methods of Cost Variability

Comparison Method

Under this method, the quantum of output at two different levels of activity is compared with corresponding amount of semi-variable costs. As fixed cost remains constant, variable cost is determined by applying the following ratio:Variable Cost Per Unit =
Change in Semi-Variable Cost / Change in Volume of Output

Problem:Months January, 2007 February March Production


(Units) ( x )

S.V.Cost
(Rs.) ( y )

200 150 250

2,000 1,750 2,250

April
May June

300
400 500

2,500
3,000 3,500

Segregation of Semi Variable Cost

Month

Production S.V.Cost Variable Fixed Cost (Rs.) Cost (Rs.) (Units) (Rs.) 300 400 100 2,500 3,000 500 1,500 2,000 1,000 1,000

April,2007

May,2007

Change

Variable Element of Cost Per Unit = 500/100 = Rs. 5 Per Unit

The High & Low Points or Range Method

This method is similar to the comparison method except that the data relating to the highest and lowest level of activity are considered

Month

Production S.V.Cost Variable Fixed Cost Cost (Units) (Rs.)


(Rs.) (Rs.)

Feb.

June Change

150 500 350

1750 3500 1750

750 2500

1,000 1,000

Average Method

Under this method of segregation of fixed and variable elements of cost, first the average of the data relating to selected two levels of activity is calculated and then the range method is applied. Average Production (200+150)/2 = 175
(400+500)/2= 450

Months
First 2 Months Last 2 Months

Average S.V. Cost (2000+1750)/2 = 1875


(3000+3500)/2 = 3250

Change

275

1375

The Equation Method

Under this method, variable and fixed element of semivariable cost is determined by means of straight line equation.

y = mx + c
Where, y = Total semi-variable cost

x = Output (in units) m = Variable Cost per unit c = Fixed Cost Element

Least squares method

This method is considered as most effective & accurate method to segregate semi-variable cost into fixed and variable elements. It is a statistical method based on the linear equations : y = mx + c or y = mx + Nc and xy = mx2 + cx

Where, y = Total semi-variable cost x = Output (in units) m = Variable Cost per unit c = Fixed Cost Element N = Number of observations

The Graphical Method (Scatter Diagram)

Under this method of segregating semi variable costs into fixed and variable elements, all relevant given data are plotted on a scatter graph .
The volume of production is plotted on the horizontal axis and semi-variable cost on vertical axis. Corresponding to the volume of production, points of semivariable costs are drawn. A line of best fit is drawn from the plotted points in such a way that the fair average relationship between volume of production and cost is established. Point falling far away from the line of best fit are abnormal and, hence, should be ignored.

1.

2.

3.

Semi Variable Cost

5000 Total Semi-Variable Cost Line 4000 3000 Variable Cost 2000 1000 Fixed Cost 0 100 200 300 400 500

Volume of Production in Units

The Graphical Method (Scatter Diagram)


4.

The point where best fit (total semi-variable cost line) intercepts the vertical axis is the fixed cost. From this point, a line parallel to the horizontal axis is drawn to show fixed cost line. The slope of the total semi-variable cost line known as the line of best fit determines the variable elements. The variable cost at any level of activity can be ascertained from the difference between the fixed cost line and total cost line.

5.

Analytical Method

Based on careful analysis of each item to determine how far the cost varies with volume. Analyst determines from the past experience as to what portion of semi-variable costs comprises of variable cost element and fixed cost element. Simple method but suffers from the subjectivity of the accountant or the analyst.

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