Methods of Cost Variability
The Methods * The Comparison Method * High and Low Point or Range Method * The Equation Method * The Average Method * The Graphic Method (Scatter diagram) * The Method of Least Squares * The Analytical Method or Degree of Variability Method
Illustration
From the following month-wise information in respect of semi-variable costs of a firm, segregate the cost into fixed and variable elements: Months2009 | Production (Units) | Semi Variable Cost (Rs.) | January | 200 | 2,000 | February | 150 | 1,750 | March | 250 | 2,250 | April | 300 | 2,500 | May | 400 | 3,000 | June | 500 | 3,500 |
The Comparison Method
Under this method, the quantum of output at two different
…show more content…
The Method of Least Squares
This is the most accurate method to segregate the fixed and variable costs.
It is a statistical method based on linear equations. y = mx + c ……… (i)
Or ∑y = m∑x + Nc ……… (ii)
And, ∑xy = m∑x2+ c∑x ……… (iii)
Where,
y= Total semi-variable cost m = Variable cost per unit x = Volume of output c = Fixed cost element
N = Number of Observations
Taking the data given, we compute the value of ∑x, ∑y, ∑x2 and ∑xy as follows: Month | Output (x) | Semi Variable Cost (y) | x2 | xy | January | 200 | 2,000 | 40,000 | 4,00,000 | February | 150 | 1,750 | 22,500 | 2,62,500 | March | 250 | 2,250 | 62,500 | 5,62,500 | April | 300 | 2,500 | 90,000 | 7,50,000 | May | 400 | 3,000 | 1,60,000 | 12,00,000 | June | 500 | 3,500 | 2,50,000 | 17,50,000 | | ∑x =1,800 | ∑y =15,000 | ∑x2 =6,25,000 | ∑xy =49,25,000 |
Substituting the values in equation (i) and (ii), we get:
15,000 = 1,800m + 6c ……… (iii)
49,25,000 = 6,25,000m + 1,800c ………(iv)
(iii)*300 : 45,00,000 = 5,40,000m + 1,800c ……(v)
Subtracting (v) from (iv):
4,25,000 = 85,000m; or m = 5; or variable cost = Rs. 5 per unit
Now, substituting the value of m = 5 in any equation, say (iii), we can ascertain the element of fixed cost:
15,000 = 1,800*5 + 6c; or c = 1,000; or Fixed cost = Rs. 1,000
The Analytical Method or Degree of Variability Method
This method is based upon ‘careful analysis of each item to determine how far the cost varies with
There are also various cost assumptions used by businesses, with every entity choosing a respective method in accordance to their inventories, based on the effects they
2.) What is the ‘relevant range’ for the cost structure? In other words, at what volume might you expect the fixed and variable costs to change appreciably?
10. If 12,500 units are produced, what is the total amount of fixed manufacturing cost incurred to support this level of production?
Given the highly competitive nature of today’s markets we as a company must provide high quality products to survive. Quality itself has become a major competitive factor and in many ways is a contributing factor in success or failure. The intent of this memo is to identify, explain and evaluate the three types of cost associated with quality.
Total cost = (F * T/Q) + (H * Q / 2) = (80 * 200,000 / 10,000) + (1.00 * 10,000/2)
The standard costs and variances for direct materials, direct labor, and factory overhead for the month of May are as follows:
Question 3: Identify all costs associated with this venture. Categorize these costs as fixed or variable.
Unit contribution = Unit Price – Unit Variable Cost = $1.80 – $1.40 = $0.40
Springfield Express has an opportunity to obtain a new route that would be traveled 20 times per month. The company believes it can sell seats at $ 175 on the route, but the load factor would be only 60 percent. Fixed cost would increase by $ 250,000 per month for additional personnel, additional passenger train cars, maintenance, and so on. Variable cost per passenger would remain at $ 70.
2.) For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour.
I would like to bring to your attention three types of costs when quality considerations are made here at Acme Catsup Company. The first costs would be our failure costs. The second would be our appraisal costs. The third is the cost of prevention.
1. Tutti’s Sandwich Shop has the following information regarding costs at various levels of monthly sales. Help Tutti separate her costs into fixed costs and variable costs so that she can predict and evaluate costs at varying levels of guests served.
(Other revenue---$12,685 from March; Qi---intercompany hours; Qc---commercial hours). If the intercompany hours reach the capacity of 205 hours per month, then the revenue will be 800Qc+94,685.
The product my business has chose to produce is water bottles. After some research it can be said that the typical production cost of one water bottle unit is $20. Total fixed costs for my company including rent and utilities are $4000 per month. Given these numbers a linear cost function for my product can be constructed; C(x) = 20x + 4000. In this equation x represents water bottles produced each month at a price of $20 along with $4000 of total fixed costs. An estimated total cost per month can then be determined of $120,000 looking at what the company can afford. Using the cost function C(x), we can plug in 120,000 to then determine the number of water bottles produced each month, which will be x. The beginning equation is C(120000) = 20x + 4000, begin by subtracting 4000 from each side leaving us with 116000 = 20x then divide both sides of the equation by 20 to get a final answer of x = 5800. This is the number of bottles produced each month.