This document discusses different types of cost behavior and methods for analyzing mixed costs. It describes variable costs, fixed costs, and semi-variable costs. Several methods are presented for separating mixed costs into variable and fixed components, including account analysis, industrial engineering, conference methods, high-low analysis, regression analysis, and scattergraph analysis. Each method has strengths and weaknesses for estimating cost functions based on factors like objectivity, use of data points, and complexity.
This presentation will help you develop some learning regarding to budgeting its role and importance in planning and control and then will some shed light on Flexible Budgeting, Capacity and Volume of The Flexible Budget, Analysis of the Cost Behavior, Determining the Fixed & Variable Elements of the Semi Variable Expense, High & Low Points Method , Statistical Scatter Graph Method, Method of the Least Square, Preparing a Flexible Budget, Flexible Budget with Multiple Cost Drive and Flexible Budget Input versus Output. This presentation was prepared for my Cost Accounting class project.
This presentation will help you develop some learning regarding to budgeting its role and importance in planning and control and then will some shed light on Flexible Budgeting, Capacity and Volume of The Flexible Budget, Analysis of the Cost Behavior, Determining the Fixed & Variable Elements of the Semi Variable Expense, High & Low Points Method , Statistical Scatter Graph Method, Method of the Least Square, Preparing a Flexible Budget, Flexible Budget with Multiple Cost Drive and Flexible Budget Input versus Output. This presentation was prepared for my Cost Accounting class project.
methods of determining cost behaviour.pptxSudhamathi4
Methods of Determining cost behavior
Judgment based methods
Industrial engineering method
Account analysis method
Quantitative methods
High-Low method
Scatter plot method
Least square method
Judgment based method
1. Industrial Engineering Method
Physical observation and analysis
Time and motion study
Very expensive to implement
Seldom updated once they are done
Mostly used in manufacturing process where there is a direct link between materials and labour inputs with the outputs.
Can be applied to new processes and designs
Less useful in case of costing services
Account analysis method
Costs are classified into fixed, variable and mixed costs
Accountant uses judgment and experience to separate the accounts into two categories – Fixed and variable
Once the fixed categories are known, the monthly cost can be computed and this is the fixed amount.
The variable categories need to be further separated into categories according to the driver the accountant wishes to associate with the account
Quantitative methods
1. High-Low method:
The high-low method preselects the two points that are used to compute the parameters F ( Fixed cost) and V ( variable cost).
High point is the point with the highest output or driver level.
Low point is the point with the lowest output or driver level.
High and low point determined by the independent variable
1.Determine high and low point
The high number of moves is in May and the low number of moves is in January.
2. Calculate the variable rate for materials handling based on the number of moves.
Variable rate = ( High cost – Low cost)/ ( High moves- Low moves)
= ($7,500- $2,000)/ (500-100)
= $13.75 per move
3. Calculate the fixed monthly cost of material handling
Fixed cost= Total cost – ( Variable rate * moves)
= $7500 –($13.75*500)
=$625
4. Write the cost formula for the material handling activity showing the fixed cost and the variable rate.
Total cost = Fixed cost + Variable cost (X)
X= No of moves
Total cost = $625+$13.75(x)
5. If company estimates that Nov. will have 350 moves, what is the total estimated materials handling cost for that month?
Material handling cost = $625 +$13.75(350)
= $ 5,437.50
6. If the company wants to estimate the materials handling cost for the coming year and expects 3,940 moves, what will be the material handling cost?
12($625)+$13.75(3940)
= $61,675
2. Scatter plot method
Plot the data points so that the relationship between materials handling costs and activity output can be seen.
Scatter point can provide insight concerning the relationship between cost and output by allowing one to visually fit a line to the points on the scatter graph.
3. Method of Least Square
Method of least square identifies the best-fitting line.
With the help of this line cost can be estimated.
Method of least square is also statistically called as regression model.
Learning curve and Nonlinear cost behaviour
Learning curve is an important type of nonlinear cost curve
Presentation on topics:-
1. Measurement of Cost Behaviour
2. Cost Drivers and Cost Behaviour
3. Management Influence on Cost Behaviour
4. Cost Functions
5. Methods of Measuring Cost Functions
6. Cost Management System
ABC System (Concept and Principles)
7. Various Basis of Overhead Distribution
8. Different Cost for Different Decisions
Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.
The learning outcome is to describe linear cost functions, to explain the importance of causality in estimating cost functions, to understand various methods of cost estimation, and to outline six steps in estimating a cost function using quantitative analysis.
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methods of determining cost behaviour.pptxSudhamathi4
Methods of Determining cost behavior
Judgment based methods
Industrial engineering method
Account analysis method
Quantitative methods
High-Low method
Scatter plot method
Least square method
Judgment based method
1. Industrial Engineering Method
Physical observation and analysis
Time and motion study
Very expensive to implement
Seldom updated once they are done
Mostly used in manufacturing process where there is a direct link between materials and labour inputs with the outputs.
Can be applied to new processes and designs
Less useful in case of costing services
Account analysis method
Costs are classified into fixed, variable and mixed costs
Accountant uses judgment and experience to separate the accounts into two categories – Fixed and variable
Once the fixed categories are known, the monthly cost can be computed and this is the fixed amount.
The variable categories need to be further separated into categories according to the driver the accountant wishes to associate with the account
Quantitative methods
1. High-Low method:
The high-low method preselects the two points that are used to compute the parameters F ( Fixed cost) and V ( variable cost).
High point is the point with the highest output or driver level.
Low point is the point with the lowest output or driver level.
High and low point determined by the independent variable
1.Determine high and low point
The high number of moves is in May and the low number of moves is in January.
2. Calculate the variable rate for materials handling based on the number of moves.
Variable rate = ( High cost – Low cost)/ ( High moves- Low moves)
= ($7,500- $2,000)/ (500-100)
= $13.75 per move
3. Calculate the fixed monthly cost of material handling
Fixed cost= Total cost – ( Variable rate * moves)
= $7500 –($13.75*500)
=$625
4. Write the cost formula for the material handling activity showing the fixed cost and the variable rate.
Total cost = Fixed cost + Variable cost (X)
X= No of moves
Total cost = $625+$13.75(x)
5. If company estimates that Nov. will have 350 moves, what is the total estimated materials handling cost for that month?
Material handling cost = $625 +$13.75(350)
= $ 5,437.50
6. If the company wants to estimate the materials handling cost for the coming year and expects 3,940 moves, what will be the material handling cost?
12($625)+$13.75(3940)
= $61,675
2. Scatter plot method
Plot the data points so that the relationship between materials handling costs and activity output can be seen.
Scatter point can provide insight concerning the relationship between cost and output by allowing one to visually fit a line to the points on the scatter graph.
3. Method of Least Square
Method of least square identifies the best-fitting line.
With the help of this line cost can be estimated.
Method of least square is also statistically called as regression model.
Learning curve and Nonlinear cost behaviour
Learning curve is an important type of nonlinear cost curve
Presentation on topics:-
1. Measurement of Cost Behaviour
2. Cost Drivers and Cost Behaviour
3. Management Influence on Cost Behaviour
4. Cost Functions
5. Methods of Measuring Cost Functions
6. Cost Management System
ABC System (Concept and Principles)
7. Various Basis of Overhead Distribution
8. Different Cost for Different Decisions
Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.
The learning outcome is to describe linear cost functions, to explain the importance of causality in estimating cost functions, to understand various methods of cost estimation, and to outline six steps in estimating a cost function using quantitative analysis.
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2. Cost Behavior
- how a cost will react as changes take place in the level of business
activity.
3. Types of Cost Behavior Pattern
1. Variable Cost
2. Fixed Cost
3. Mixed Cost
4. Semi variable cost
a. Semivariable cost that increase at an increasing rate (ex. Electricity)
b. Semivariable cost that increase at a decreasing rate (ex. Learning curve cost)
5. Semi fixed cost (step function cost or step cost)
10. The Analysis of Mixed Cost
1. Account analysis
2. Industrial engineering method
3. Conference method
4. High-low method
5. Regression Analysis Method
6. Scattergraph or Visual Fit
11. Account Analysis
It makes uses of the experience and judgement of managers and
accountants who are familiar with company operations and the way
costs react to changes in activity level
12. Account Analysis
The account analysis involves the ff. steps:
(i) Review each cost account used to record the costs that are of interest.
Each cost is identified as either fixed or variable depending on the
relationship between the cost and some activity
(ii)Each major class of manufacturing overhead or other mixed cost is
itemized. Each cost is then divided into its estimated variable and fixed
components. This is done on the basis of the experience and judgement
of accounting and other personnel
13. Industrial Engineering Method
Estimates cost function by analyzing the relationship between inputs
and outputs in physical forms. Engineering estimates indicate what
costs should be.
14. Industrial Engineering Method
Steps in applying engineering method of estimating costs.
i. A study of the physical relation between the quantities of inputs
(material, labor etc) and each unit of output (finished product) is done
a. A detailed step by step analysis of each phase of each manufacturing process
together with the kids of work performed, and time to perform each step is done.
b. Engineering estimates of the materials required for each unit of production are
obtained from drawings and specification sheets
15. Conference Method
Cost functions are estimated based on the analysis and opinions
about costs and their drivers obtained from various departments of
an organization such as purchasing, process engineering,
manufacturing, employee relations and so on. This information is
used to determine the selling price of the product, optimum product
mix and evaluate cost improvements over time.
16. High-low Method
- is based on costs observed at both the high and low levels of
activity within the relevant range
Variable cost per unit (b) = highest cost –lowest cost
highest activity level-lowest activity level
Fixed cost (a) = Total cost – variable cost
= Total cost – b (no. of units)
17. High-low Method
Illustrative Case I. Predictors, Inc.
Given: Data for the past 10 months were collected for Predictors, Inc. to
estimate the variable and fixed manufacturing overhead.
18. High-low Method
The following data on supplies cost and direct labor hours from Jan, to October are available:
Required: Determine the variable cost rate per hour and the fixed cost portion using the high-
low method
X Y
DIRECT LABOR
HOURS
SUPPLIES COST
20 50
40 110
60 150
20 70
30 80
40 100
50 150
10 60
30 110
50 120
20. Regression Analysis Method
Uses all available data to estimate the cost function
It is a statistical method that measures the average amount of change in
the dependent variable that is associated with a unit of change of one or
more independent variable.
21. Regression Analysis Method
Simple regression analysis – estimates the relationship between the dependent variable
and one independent variable
Multiple regression analysis – estimates the relationship between the dependent and
multiple independent variable
Least squares regression method – a statistical technique which is often used in
separating mixed costs into their fixed and variable components
- Basically a line of regression is determined by solving two simultaneous linear equations which
which are based on the condition that the sum of deviations above the line equals the sum of
deviations below the line
23. Regression Method
The following data on supplies cost and direct labor hours from Jan, to October are available:
Required: Determine the variable cost rate per hour and the fixed cost portion using the high-
low method
X Y
DIRECT LABOR
HOURS
SUPPLIES COST
20 50
40 110
60 150
20 70
30 80
40 100
50 150
10 60
30 110
50 120
27. Scattergraph or Visual Fit
This is a rough guide for cost estimation which plot the cost against past activity
levels. The line is drawn, insofar as possible by visual judgement, so that the
distances of the observation above the line are equal to the distances of the
observations below the line. The line is called regression line.
28. Scattergraph or Visual Fit
Steps involved in the use of Scattergraph
i. On a graph, plot actual costs (on vertical axis) during the period under study against the volume
levels (on horizontal axis)
ii. The line of best fit is then drawn by visual inspection of the plotted points, the line representing
the trend shown by the majority of the points
iii. The fixed cost is estimated by extending the left end of the line to the vertical axis
iv. The variable cost rate or slope of the cost line is determined by dividing the difference between
any two levels of activities by the difference in costs corresponding to the same level of activities
29. Strengths and Weaknesses of
Cost Estimation Methods
METHOD STRENGTHS WEAKNESSES
Account Analysis Provides a detailed expert analysis of the
cost behavior in each account
Subjective
Engineering Method Based on studies of what future costs should
should be rather than what past costs have
been
Not particularly useful when the
physical relation between inputs and
outputs is indirect
High-low method Simple to apply Uses only two data points which may
not produce accurate results
Scattergraph Method Uses all the observations of cost data
Relatively easy to understand and apply
The fitting of the line to the
observations is subjective.
Difficult to do where several
independent variables are to be used.
Least-squares regression method Uses all of the observations of cost data
The line is statistically fit to the observations
A measure of the goodness of fits of the line
to the observations is provided
Relatively easy to use with computers and
sophisticated calculators
The regression model requires that
several relatively strict assumptions be
satisfied for the results to be valid