SAINT COLUMBAN COLLEGE

College of Business Education

ACCTG 104 – COST ACCOUNTING & CONTROL I

 ANALYSIS OF MIXED COSTS/COST BEHAVIOR ANALYSIS

Ideally, for both planning and for making certain types of decisions, all costs would be classified as either fixed or
variable, with mixed costs being separated into their fixed and variable components. There are different methods of
separating/segregating mixed costs into fixed and variable components: (1) High-low Point Method, (2) Method of
Least Squares, and (3) Scattergraph Method.

(1) HIGH LOW POINT METHOD

High-Low method is one of the several techniques used to split a mixed cost into its fixed and variable
components. Although easy to understand, high low method is relatively unreliable. This is because it only takes two
extreme activity levels (i.e. labor hours, machine hours, etc.) from a set of actual data of various activity levels and
their corresponding total cost figures.
Summary of Electricity Costs and
Direct Labor Hours Direct Labor Hours _Cost_
Month Direct Cost of Highest Month (October) 47 P 726
Labor Electricity Lowest Month (February) ___24_ 565
Hours 23 P 161
January 28 P 625 Variable Rate Per Direct Labor Hour = _P161_ = P7/direct labor
February 24 565 hour
March 30 630 23 hours
April 33 640
May 38 685
June 34 640 Fixed cost can be computed from either the high or low data:
July 35 655 High Low
August 40 700 Total Cost of Electricity P 726 P 565
September 42 715 Less: Variable Portion (7/ direct labor hour) 329 168
October 47 726 Monthly Fixed Cost P 397 P 397
November 43 700
December 32 630

The formula for projecting the total monthly cost of electricity based on these data would be P397 plus P7
multiplied by the direct labor hours expected to be worked during the period (y = a + bx) where
y = Total Cost b = Variable Cost per cost driver
a = Fixed Cost x = Activity Level
Question: How much is the total cost of electricity if the direct labor hours used next month is 36 hours?
(2) METHOD OF LEAST SQUARE
The three formulas to be used in the least-square method are:
Equation 1: y = a + bx Equation 2: ∑y = na + b∑x Equation 3: ∑xy = ∑xa + b∑x2
Month Direct Labor Cost of xy x2
Hours(x) Electricity(y)
January 28 625
February 24 565
March 30 630
April 33 640
May 38 685
June 34 640
July 35 655
August 40 700
September 42 715
October 47 726
November 43 700
December 32 630
Total (∑) 426 7,911
By elimination method:
Equation 2 ∑y = na + b∑x Substituting the value for Equation 2, compute for a:
7,911 = 12a + 426b 7,911 = 12a + 426b

Equation 3 ∑xy = ∑xa + b∑x2

284,207 = 426a + 15,620b

Equation 2 ______________________ Question: How much is the total cost of electricity if the
direct labor hours used next month is 36 hours?
 b=

(3) SCATTERGRAPH METHOD

Scatter graph method is a graphical technique of separating fixed and variable components of mixed cost by
plotting activity level along x-axis and corresponding total cost (mixed cost) along y-axis. A regression line is then
drawn on the graph by visual inspection. The line thus drawn is used to estimate the total fixed cost and variable cost
per unit. The point where the line intercepts y-axis is the estimated fixed cost and the slope of the line is the average
variable cost per unit. Since the visual inspection does not involve any mathematical testing therefore this method
should be applied with great care.
Step 1: Draw scatter graph. Plot the data on scatter graph. Plot activity level (i.e. number of units, labor hours etc.)
along x-axis and total mixed cost along y-axis.
Step 2: Draw regression line. Draw a regression line over the scatter graph by visual inspection and try to minimize
the total vertical distance between the line and all the points. Extend the line towards y-axis.
Step 3: Find total fixed cost. Total fixed is given by the y-intercept of the line. Y-intercept is the point at which the
line cuts y-axis.
Step 4: Find variable cost per unit. Variable cost per unit is equal to the slope of the line. Take two points (x 1,y1) and
(x2,y2) on the line and calculate variable cost using the following formula:
y2 − y1
Variable Cost per Unit = Slope of Regression Line = 
x2 − x1
Example. Company α decides to use scatter graph method to split its factory overhead (FOH) into variable and fixed
components. Following is the data which is provided for the analysis.

Month Units FOH

1 1,520 $36,375
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800

Solution:

Fixed Cost = y-intercept = $18,000

Variable Cost per Unit = Slope of Regression Line

To calculate slope, we will take two points on line: (0,18000) and (3500,68000)
Variable Cost per Unit = (68000 − 18000) = $14.286
(3500 − 0)
Exercise 1. Valdez Motors Co. makes motorcycles. Management wants to estimate overhead costs to plan its
operations. A recent trade publication revealed that overhead costs tend to vary with machine hours. To check this,
they collected data for the past 12 months as follows:
Month Machine Overhead
Requirements:
Hours Costs
1. Use the high-low method to estimate the fixed and
1 175 P 4,500
variable portion of overhead costs based on machine
2 30 750
hours.
3 160 4,321
4 190 5,250 2. If the plant is planning to operate at a level of 300
5 600 16,475 machine hours next period, what would be the estimated
6 200 5,400 overhead costs?
7 160 4,450
8 150 3,975 3. Use the method of least square to estimate the fixed and
9 210 5,275 variable portion of overhead costs based on machine
10 180 4,760 hours. If the plant is planning to operate at a level of 300
11 170 4,325 machine hours next period, what would be the estimated
12 145 4,100 overhead costs?
Exercise 2. Westinghouse Company manufactures major appliances. Because of growing interest in its product, it has
just had its most successful year. In preparing the budget for next year, its controller compiled these data
Month Machine Electricity
Hours Costs Requirements: Using the (1) high-low method, (2) least-
May 6,000 P 60,000 squares method and (3) Scattergraph method:
July 5,000 53,000 1. Compute the variable cost per machine hour
August 4,500 49,500 2. The monthly fixed electricity costs
Septembe 4,000 46,000 3. The total electricity costs if 4,800 machine hours are
r projected to be used next month.
October 3,500 42,500
November 3,000 39,000
December 100 1,000