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Cost Concept and Segregation

(1) Semi-variable costs have both fixed and variable components. The high-low method and least squares method can be used to segregate these costs. (2) The high-low method uses the difference between total costs at high and low production levels to calculate the variable cost per unit. The fixed cost is what remains. (3) The least squares method involves calculating the slope (variable cost per unit) and y-intercept (fixed cost) of the line of best fit through data points of production levels and total costs.

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748 views1 page

Cost Concept and Segregation

(1) Semi-variable costs have both fixed and variable components. The high-low method and least squares method can be used to segregate these costs. (2) The high-low method uses the difference between total costs at high and low production levels to calculate the variable cost per unit. The fixed cost is what remains. (3) The least squares method involves calculating the slope (variable cost per unit) and y-intercept (fixed cost) of the line of best fit through data points of production levels and total costs.

Uploaded by

satya
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Cost Concept and Segregation

Segregation of Semi – variable cost :


Cost is the amount of resources given up in exchange for some goods or
services. Cost means the total of all expenses incurred for product or services. (1) Under High – Low method :
- Variable cost per unit (b) = High cost - Low cost
* Fixed cost : A cost that doesn’t change in a short term, irrespective of how the High unit - Low unit
volume of production or the sales may change is the fixed cost. These type of
costs are crucial and can’t be avoided although production level is nil. Salary, rent, Or, Variable cost per unit (b) = Difference in cost
administrative expenses etc. are some examples of fixed cost. Difference in unit
Production Unit Rent cost - For fixed cost (a),
1,000 units Rs. 20,000 Y = a + bx
2,000 units Rs. 20,000 Or, a = Y - bx

* Variable cost : These are the costs that change when the output changes. Where,
Variable cost changes exactly the same proportion as the output changes. Cost Y = Total cost
which changes in the same proportion as the units produced or sold, is the variable a = Fixed cost
cost. Some examples of variable cost are direct material, direct wages, direct b = Variable cost per unit
expenses etc. x = Production unit
Production Unit Material cost Cost per unit
1,000 units Rs. 20,000 Rs. 20
2,000 units Rs. 40,000 Rs. 20
(2) Under Least Square Method :
* Semi – variable cost : Semi – variable cost has elements of both fixed cost as Segregation of cost by using Least Square Method
well as variable cost. This type of cost remains fixed up to a certain level of Production units Indirect expenses
production and changes with the change in the volume of production beyond this (X) (Y) XY X2
level. We can see the fixed part as a base level cost that always incurred while as
the variable proportion of the cost is an additional cost which changes as we
changes the volume of production. Electricity charge, Telephone charge, Water
and supply etc. are some examples of this type of cost.
Production Unit Suprevision cost Cost per unit
1,000 units Rs. 22,000 Rs. 22
2,000 units Rs. 24,000 Rs. 12
∑X = ∑Y = ∑ XY = ∑ X2 =

- Variable cost per unit (b) = N∑ XY - ∑X . ∑Y


N ∑ X2 - (∑X)2

- Fixed cost (a) = ∑Y - b . ∑X


N

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