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The document outlines various methods for segregating mixed costs, including the Account Analysis Method, Conference Method, Engineering Method, Scattergraph Method, High-Low Method, and Least-Square Method. Each method is described with its advantages and disadvantages, along with steps for applying the High-Low Method and Least-Square Method. Additionally, it covers correlation analysis and provides illustrations for practical application of these methods.

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13 views4 pages

Inbound 9220130664837625279

The document outlines various methods for segregating mixed costs, including the Account Analysis Method, Conference Method, Engineering Method, Scattergraph Method, High-Low Method, and Least-Square Method. Each method is described with its advantages and disadvantages, along with steps for applying the High-Low Method and Least-Square Method. Additionally, it covers correlation analysis and provides illustrations for practical application of these methods.

Uploaded by

jude galwat
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1

AE 313

METHODS OF SEGREGATING MIXED COSTS


1. ACCOUNT ANALYSIS METHOD
- The account analysis approach requires that each individual cost is examined,
and based on judgment is categorized as a fixed or variable cost.
- This requires the use of trend analysis, the past experience in judging
whether a cost is fixed or variable.
2. CONFERENCE METHOD
- It is an approach to cost estimation that pools together data, analyses, and
knowledge from expert sources in order to make decisions about costs.
- In other words, this method looks at several different parts of an organization
to get different perspectives about how to estimate costs.
3. ENGINEERING METHOD (INDUSTRIAL ENGINEERING METHOD)
- Industrial engineering method is a systematical way of examining the
relationship between cost drivers and costs by analyzing the inputs coming
into the company, the outputs that are created, and the work that goes into
the process.
- In other words, it is a detailed look at the entire production process and how
that process affects the costs of an organization.
- NOTE: Engineering method is the most costly method in analyzing and
segregating costs.
4. SCATTERGRAPH METHOD (VISUAL FIT METHOD)
- It is a graphical technique of separating fixed and variable components of
mixed cost by plotting activity level along x-axis and corresponding total cost
(i.e. 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.
- CAUTION IN USING THIS METHOD: Since the visual inspection DOES NOT
involve any mathematical testing therefore this method should be applied
with great care.
- NOTE: This method is considered the best in detecting outliers. (an outlier is a
data point that differs significantly from other observations) The main
question is how variable costs, fixed costs and mixed costs do look like in a
graphical format?
5. HIGH-LOW METHOD
- Is a crude technique or method of segregating mixed costs. This method
utilizes only two points in doing a cost analysis making it a least accurate
method. (This method provides only a reasonable cost estimate).
- Advantages:
a) Simple to use and uses less complex computations.
b) Lack of formality in cost estimation.
- Disadvantages / Limitations:
a) High Low Method assumes a linear relationship between cost and
activity which is an over simplified analysis of cost behavior.
b) High Low Method is not representative of entire data as it is based on
just 2 activity levels. Thus, outlier may be included in the computation.
c) High-low method does not account for the effect of inflation on a
portion of financial data which could result in overestimation of the
variable cost element of a mixed cost.
6. LEAST-SQUARE METHOD / LINEAR REGRESSION
- It is a statistical technique that may be used to estimate a linear total cost
function for a mixed cost. This method is considered to be the most accurate
since it derives the fixed and variable cost by means of statistical analysis.
- Advantages:
a) Incorporation of all data in the computation and not just 2 points.
b) Provides precise cost estimation. - Disadvantages:
a) Outlier may be included in the computation.
b) More complex mathematical calculations.

What is the cost formula?

NOTE: Based on the accounting equation, bx is the “TOTAL VARIABLE COST”.

HIGH-LOW METHOD
STEPS IN APPLYING HIGH LOW METHOD:
STEP 1: Identify the highest and lowest activity level or cost driver.
NOTE:
a) What is being identified in high-low method as the highest and lowest point is
just the cost driver. The highest and lowest cost is not identified separately.
b) What if there are 2 or more highest and lowest points? If you are on the high
side, choose the point with the highest cost. If you are on the low side, choose
the point with the lowest cost.

b = 𝑯𝒊𝒈𝒉 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕−𝑳𝒐𝒘 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕


STEP 2: Calculate variable cost per unit

𝑯𝒊𝒈𝒉 𝑪𝒐𝒔𝒕 𝑫𝒓𝒊𝒗𝒆𝒓−𝑳𝒐𝒘 𝑪𝒐𝒔𝒕 𝑫𝒓𝒊𝒗𝒆𝒓

Legend: b = Variable Cost per Unit

2
STEP 3: Calculate total fixed cost a = High Total Cost –
(High cost driver * b) OR a = Low Total Cost –
(Low cost driver * b)
Legend: a = Total Fixed Cost

STEP 4: Formulate the cost equation that will be used in different level of activities
WITHIN RELEVANT RANGE.
Y=a+bx

Legend: Y = Total Cost / Mixed Cost x = Cost Driver / Activity Level

ILLUSTRATION:
A controller is interested in analyzing the fixed and variable costs of indirect labor as related
to direct labor hours. The following data have been accumulated:

REQUIREMENT: Determine the amount of the fixed portion of indirect labor expense and the
variable rate for indirect labor expense, using the high and low points method.
SOLUTION:
- choose the highest and lowest point of the cost driver. In this case, the cost
driver is the direct labor hours. Thus, highest point is 560 and lower point is
425

𝑯𝒊𝒈𝒉 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕−𝑳𝒐𝒘 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = 3,225 – 2,880 = 345 = 2.56


H𝒊𝒈𝒉 𝑪𝒐𝒔𝒕 𝑫𝒓𝒊𝒗𝒆𝒓−𝑳𝒐𝒘 𝑪𝒐𝒔𝒕 𝑫𝒓𝒊𝒗𝒆𝒓 560 – 425 135
b=

a = High Total Cost – (High cost driver * b) = 3,225 – (560 * 2.56) = 1,792
Y = 1,792 + 2.56 x

ILLUSTRATION:
RIKIMARU CORP. has an average unit cost of P18.50 at a volume of 100,000 units. At 200,000
units the average unit cost is P14.25.

REQUIREMENTS: (a) Compute the variable cost per unit; (b) Compute the total fixed cost.

b = (14.25 * 200K) – (18.50 * 100K) = 2,850,000 – 1,850,000 = 1,000,000 = 10


200,000-100,000 100,000 100,000
a = High Total Cost – (High cost driver * b) = 2,850,000 – (200k * 10 ) =
850,000
Y = 850,000 + 10x

LEAST-SQUARE METHOD / LINEAR REGRESSION


- In using least-square method, the following equations are to be used:
∑y = n a + b ∑ x ∑xy = a ∑ x + b ∑ x2

ILLUSTRATION:
3
A company owns two automobiles that are used by employees on company business, usually
for short trips. Mileage and expenses, excluding depreciation, by quarters were as follows
during a typical year (quarters instead of months are used to simplify the arithmetic):

REQUIREMENT: Determine the variable cost per mile (nearest tenth of a cent) and the fixed
costs per quarter, using the method of lease squares.

SOLUTION:
- X is the cost driver; y = cost

∑ x = 12,000 ∑y = 2,160 ∑xy = 6,610,000 ∑ x2 = 37,500,000

∑y = n a + b ∑ x ∑xy = a ∑ x + b ∑ x2
2,160 = 4a + 12,000b 6,610,000 = 12,000a + 37,500,000b
3,000 (2,160) = (4a + 12,000b) 3,000 - 6,480,000 = 12,000a +
36,000,000b
6,480,000 = 12,000a + 36,000,000 b 130,000 = - + 1,500,000b
b = 0.087

 To compute for a, simply use the formula and substitute the value of b.
∑y = n a + b ∑ x
2,160 = 4a + 12,000(0.087)
2,160 = 4a + 1,044
4a = 2,160 – 1,044
a = 279 Y = 279 + 0.087x

CORRELATION ANALYSIS
 Correlation analysis is a method of statistical evaluation used to study the strength
of a relationship between two, numerically measured, continuous variables
 Coefficient of correlation (r) – is a measure of the extent of linear relationship. The
results extend from -1 to +1. If r is positive, there is a direct relationship between x and
y. When r is negative, there is an inverse relationship between x and y. And when r is 0,
there is no relationship at all between x and y.
 Coefficient of determination (r2) – represents the percentage of the total variation
in the dependent variable. The results extend from 0 to +1. High r2 means that cost
driver is highly related to the dependent variable.
 Standard Error of Estimate - is the measure of variation of an observation made
around the computed regression line

References
MANILA, C. R. (2021 (Batch 90)). INTRODUCTION TO MAS . Manila City, CPAR Building 837 F. Cayco Street, Sampaloc,
Philippines, 1008: CPA REVIEW SCHOOL OF THE PHILIPPINES MANILA.

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