Methods of Seperating Mixed Cost

1. Methods for separating mixed cost
K. Sasi Kumar

2. Methods for separating mixed costs
Each method requires us to make the simplifying
assumptions of linear cost relationship
Y = F + VX
where
y = Total activity cost (dependent
variable)
F = Fixed cost component (intercept parameter)
V = Variable cost per unit of activity (slope
parameter)
X = Measure of activity output (the independent
variable)

3. Intercept parameter
• Graphically the intercept parameter is the
point at which the mixed cost line
intercepts the cost (vertical) axis. The
intercept parameter corresponds to fixed
activity cost

4. Slope parameter
• The slope parameter corresponds to the
variable cost per unit of activity.
Graphically this represents the slope of the
mixed cost line.

5. Methods of mixed
Cost segregation
Industrial
Engineering
Method
Graphic
Method
Or
Scatter diagram
Method of least
Squares
Or
Simple linear
Regression
Analysis method
Two point method
Or
High – Low
method
Analytical
Approach
Or
Degree of
variability
Visual fit
method
Accounting
Inspection
method

6. Industrial Engineering Method
1.This method is used to collect cost
information – data not available in the
organizations records.
2. It is particularly relevant when an
organization is just beginning a new
activity.
3.Every productive process involves
employing a particular mix of materials,
labour,overheads.

7. 4. Ex : 2 kgs of materials + 3 hours of labour
+ Rs.50 of overheads = 1 unit of output.
5. It is particularly useful when applied to
material and labour , which occupies a
large a proportion of the output cost.
6. when cost estimates are static in nature
then it can be used in future.
7. When costing new products – it is only the
approach to estimate cost.

8. Accounting inspection method
• Fast and inexpensive way of estimating
costs.
. It examines the each account and
subsequently classifies the total cost into
fixed and variable cost elements.
. This requires management accountants
help to classify the cost into fixed and
variable –at a given level output.

9. • Ex: Total cost of American Remedies Ltd
with a volume of 7,000 units is given
below:
Account Amount Variable Fixed
DM Rs.1,50,000 1,50,000 ---
DL Rs.1,25,000 1,25,000 ---
Repairs 5,000 5,000 ---
Depreciation 15,000 ----- 15,000

10. High-Low Method
Basic geometry tells us that two points determine a
line. F, the fixed component, is the intercept of the
total cost line, and V, the variable cost per unit, is
the slope of the line.
Given two points, the slope and intercept can be
determined.
The high-low method preselects the two points that
are used to compute the parameters F and V.
The high point is defined as the point with the
highest output or driver level.

11. The low point is defined as the point with the
lowest output or driver level.
Note that the high-low points are determined by
the independent variable, not the dependent
variable (typically cost).
It is a quick way of estimating the cost behavior
and useful companies without a long history.

12. High-Low Method
1.Charminar Rubber Products Ltd., has recorded
the following data in the two most recent records:
What is the best estimate of the firms fixed costs
per period?
Total Cost of Production
(Rs.)
Volume of Production
(Units)
14,600 800
19,400 1,200

13. Separation of semi-variable costs into variable and
fixed costs:
1.Variable Cost per unit:
Change in cost / Change in activity
= 194,00-14,600 / 1200-800
= Rs.12 /- per unit.
2. Fixed Cost = Total Cost – ( No of Units x
Variable cost per unit)
= Rs.14,600 – (800 units x 12)
= Rs.5,000

14. (OR)
= Rs.19,400 – (1200 units x 12)
= Rs.5,000
Y = F + VX

15. 2. Following data has been extracted from the
records of a patel cement products ltd., whose
operations are varying from month to month:
Determine the fixed and variable components of
manufacturing overheads and hence compute the
total manufacturing overhead for an activity level of
Rs.5,00,000 machine hours.
Level of Activity Maximum Minimum
Machine Hours 8,00,000 3,00,000
Manufacturing
Overheads (Rs.
In lakhs)
52 32

16. • Solution:
• Seggregation of Manufacturing overhead into
fixed and variable components:
• 1. Variable Components =
= Change in Mafg.overhead / Change in Activity level
= Rs.52,00,000-Rs.32,00,000 / 8,00,000-3,00,000
= Rs. 4 per machine hour.
2. Fixed Cost = Total Mfg.overhead – (No of M.Hs x
Variable cost per M.H.)
= Rs.32,00,000 – (3,00,000 x Rs.4)
=Rs.20,00,000

17. For Rs.5,00,000 M.Hrs, total manufacturing cost
Variable cost (5,00,000 mh x Rs.4) = Rs.20,00,000
Fixed Cost = Rs.20,00,000
=-------------------
Total Manufacturing Overhead = Rs.40,00,000
--------------------

18. 3. The standard departmental overhead rate of
Bhandari Steel Ltd., is Rs.15 per hour. Based on
the following details provided to you, workout the
activity level at which the overhead rate has been
fixed :
Activity Level (hours) Overhead Allowance (Rs.)
6,000 1,20,000
8,000 1,44,000
10,000 1,68,000

19. Solution:
Computation of variable and fixed overheads :
1.Variable overhead rate per unit:
= Change in overhead allowance / Change in
activity level
= 1,68,000 -1,20,000 / 10,000-6,000
=Rs.12 / per hour
2. Fixed Cost = Rs.1,20,000- (6,000 x 12)
= Rs.48,000

20. 3. Total overheads = Rs.1,68,000
Less – Variable over= Rs.1,20,000
(10,000 x 12)
= ------------------
Fixed Overhead = Rs.48,000
-------------------
4. Standard departmental overhead rate =Rs.15
Less – Variable overhead rate = Rs.12
=----------
Fixed Overhead rate = Rs.3
-------------

21. 5. Calculation of Activity level at which the
overhead rate has been fixed:
= Fixed Overhead / Fixed Overhead rate
= Rs.48,000 / Rs.3 = 16,000 units.
The standard departmental overhead rate is fixed
at Rs.15 based on the activity level of 16,000 hrs.

22. Method of Least Squares
1.XYZ Ltd., furnishes the following overhead cost
behavior of mixed cost for the first 6 months of the
current year. You are required to segregate these
costs into fixed and variable:
Month Units Produced
(x)
Overhead Cost
(Y)
January 20 Rs.900
Feb 10 700
March 30 1,100
April 20 900
May 00 500
June 30 1,300
Total 110 5400

23. • Mixed Cost segregation
Month X Y XY X2
January 20 Rs.900 Rs.18,000 Rs.400
Feb 10 700 7,000 100
March 30 1,100 33,000 900
April 20 900 18,000 400
May 00 500 00 00
June 30 1,300 39,000 900
Total 110 1,15,000 2,700

24. Y = a +bx
∑y = na +b ∑x
∑xy = a ∑x +b ∑ x2
5400 = 6a + 110b ------------ 1
1,15,000 = 110 a + 2700 b -------2
Multiplying equation1 by 110 and 2 by 6, we have
5,94,000 = 660a+12,100b
6,90,000 = 660 a + 16,200 b

25. Subtract 1 – 2
96,000 = 4100 b
B = 23.41
6a = 2824.39
A = 470.73
Y = 470.73 + 23.41 x

26. • 1. Antz Industries has provided you with the following data for its
materials storeroom:
• Month Number of Shipments Storeroom Costs
• January 175 $3,000
• February 225 3,600
• March 275 4,300
• April 175 3,800
• May 200 2,700
• June 225 3,200
• July 300 4,250
• August 325 4,400
• September 275 4,100
• October 200 3,150
• November 150 2,650
• December 175 2,750

27. • You are Required to :
1.Determine the cost behavior using the high-low
method.
2. Prepare a scattergraph of the data points, using
cost as the vertical axis and number of
shipments as the horizontal axis. Do any of the
points seem to be outliers?
3. Determine the cost behavior using the
scatterplot method. How do these results
compare with the high-low method?

28. Solution
1. Variable:($4,400 – $2,650) / (325 – 150) =
$1,750 / 175 = $10.00 per shipment
2. Fixed: $4,400 – ($10 × 325) = $4,400 –
$3,250 = $1,150
Storeroom Cost = $1,150 + $10 × number of
shipments