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Acc408 Cost Classification Regression Analysis

The document discusses cost classification and control methods, emphasizing the importance of accurately determining fixed and variable costs using techniques like the least squares method and regression analysis. It presents case studies for calculating variable costs and fixed costs for different companies, illustrating the application of these methods. Additionally, it highlights the merits and limitations of regression analysis, suggesting the use of statistical software for efficiency.

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Prince Sono
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4 views4 pages

Acc408 Cost Classification Regression Analysis

The document discusses cost classification and control methods, emphasizing the importance of accurately determining fixed and variable costs using techniques like the least squares method and regression analysis. It presents case studies for calculating variable costs and fixed costs for different companies, illustrating the application of these methods. Additionally, it highlights the merits and limitations of regression analysis, suggesting the use of statistical software for efficiency.

Uploaded by

Prince Sono
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ACC408

COST CLASSIFICATION
This is an important step in cost control since there are costs that can be controlled at Board’
level, Senior management level and at Operational level.
Approaches include the use of the scatter graph, high-low method and the least squares method.
Weaknesses of the scatter graph led to the high-low method; weaknesses of the high-low method
led to the least squares method. These 2 have been considered already
The least squares method
This is a more accurate version of the graphic approach as it applies algebraic equations to
position the line of best fit precisely,
The line of best fit also termed the regression line or least squares line minimizes the sum of
squared deviations between the plotted points and the total cost line thus the term …..least
squares method
The approach uses all the data available. It is objective since it is not limited to the parameters as
in the high-low method. It is time consuming but yields more accurate results than the high-low
method.
Regression analysis is based on the equation for a straight line y=a +bx where
a-fixed cost; b-unit variable cost ; x-the independent variable whilst y-the dependent variable
Mathematicians have developed two equations to be solved simultaneously:
∑xy = a∑x + b∑x²
∑y = an +b∑x

Where a - fixed cost ; b - variable cost per unit ; n – number of observations; x – value of
independent variable; y – value of the dependent variable ; x² - value of independent variable
squared ; xy – product of x & y ; ∑ - Sigma (Greek sign for summation)

To solve for a & b, the equations can be restated as follows:


a= ∑y – b( ∑x ) / n
b = n ∑ (xy) - ∑x∑y / n ∑x² - ( ∑x )²

Case 1.
The following data related to Aye Ltd whose selling and administration costs were dependent on
the sales value. The costs were bundled together but the management accountant is interested in
knowing the variable cost per sales dollar and the fixed cost per month for subsequent decision
making

Month Sales value (x) Selling & administration costs(y)


January $425 $135
February 450 136
March 565 166
April 625 177
May 838 214
June 746 195
July 713 187
August 698 193
September 643 184
October 586 166
November 520 156
December 490 149

Required
Calculate i)the variable cost per dollar sales ii)the fixed cost per month.
The above approach is also described as simple regression analysis since it uses an independent
variable and a dependent variable.
Case 2.
Dell ltd sells computers. Compensation for salesmen is made up of a fixed salary and a
commission. Data on computers sold and the compensation paid out is as follows:
Month Computers sold Compensation incurred
January 500 $2 825
February 700 2 955
March 600 2 760
April 300 2 695
May 1 000 3 150
June 600 2 890
Required:
i)Using the high-low approach and regression analysis, compute the variable cost component of
compensation and the fixed salary per month.
ii)What conclusion can you draw from the above calculations.
Case 3. Given the following total costs and volume of output , using the simultaneous equations
determine the unit variable cost and the fixed costs

Units produced Total costs ($)


490 100
250 70
650 130
600 110
550 120
450 110
320 90
380 100
190 90

Multiple regression analysis


A firm may have more than one independent variable and has to know or determine the variable
costs associated with each of product. In this instance, multiple regression analysis has to be
carried out.
For one product, the linear relationship y = a + bx
For say 3 products, y = a + b₁ x₁ + b₂ x₂ + b₃ x ₃
Sales data would have to be collected for each product in terms of volume of sales to be
considered against total selling & administration expenses.
Merits of regression analysis
It’s the most accurate approach to cost analysis.
Limitation of regression analysis
Its time consuming hence calls for thorough record keeping
The way out is:
The use of statistical software to handle large volume of data speeds up the process.

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