S-10 Mixed costs

Trimis la data: 2010-10-10 Materia: Contabilitate Nivel: Facultate Pagini: 4 Nota: / 10 Downloads: 0
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There are 3 methods of breaking mixed costs into their fixed and variable elements: the high-low method, the scattergraph method and the least squares method1) the high-low method: requires that the cost involved be observed at both the high and the low levels of activity within the relevant range. The difference in cost observed at the 2 extremes is divided by the change in activity in order to determine the amount of variable cost involved. The fixed cost present can now be easily determined by taking total cost at either the high or the low point and deducting the variable element.
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Identify each of the company's expenses (including cost of goods sold) as being variable, fixed or mixed;By use of high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.Redo the company's income statement at the 5,000-unit level of activity by placing the revenue and expense data in the contribution format.the scattergraph method: unlike the high-low method, this method includes all points of observed cost data in the analysis through use of a graph.

Cost is shown on the vertical axis and the volume of activity is shown on the horizontal axis. Costs observed at various levels of activity are then plotted on the graph and a line is fitted to the plotted point, thorough visual inspection, being placed so that approximately equal numbers of points fall above and below it (a regression line). The point where the line strikes the vertical axis is considered to be the fixed cost element of the mixed cost. The variable portion is then determined by referring to the total cost amount of a point falling on the line.

c) the least squares method is a more sophisticated approach to the scattergraph idea. Rather than fitting a regression line through the scattergraph by simple visual inspection, the LS method fits the line by statistical analysis. The LS method is based on computations that find their foundation in the equation for a straight line, expressed Y = a + bx, with a being the fixed element, and b being the degree of variability, or the slope of the line. x is the independent variable, and Y is the dependent one. Under such an approach, the variable and fixed portions are determined as follows:

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