Fixed or Variable Cost

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Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do.
Definition:-
Fixed cost is not affected by the changes in the sales, they have slight relationship to the business and they do not change considerably when the sale increase or decrease. Fixed cost is set for particular period of time and changes occur during the
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The variable portion consists of units consumed or calls. The relationship between mixed cost and level of activity can be expressed by the following equation.
Y = a + bX
All costs are determined either as fixed or variable costs. The separate determination of the fixed and variable cost elements can be done from the following example.
High and Low point method to separate fixed and variable costs in a mixed or semi variable cost:-
High and low point is a method to segregate fixed and variable elements in a mixed cost. In the analysis of mixed cost using high and low point first of all we begin by identifying the period with the lowest level activity and the period with highest level of activity. The period with the lowest level of activity is selected as the first point and the period with highest level of activity is selected as the second point.
Consequently the formula becomes:
Variable Costs = (Y2 − Y1) ÷ (X2 − X1)
• Y2 = Cost at the high level of activity
• Y1 = Cost at the low level of activity
• X1 = High activity level
• X2 = Low activity level
Formula can also be written as:
Variable cost = Change in cost / Change in activity
While applying the high and low point method, the variable cost is obtained by dividing the difference between the high and low activity levels by the change in activity between the two points. In the following example we take the activity