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Session 2
Change inversely
Fixed Costs Unchanged in with output
More output = lower cost
relation to output
per unit
Semi-variable Cost
Having similar characteristics of both fixed
and variable costs.
2 reasons:
Within minimum level of cost required =
fixed, but beyond = variable.
Financial accounting classification (based
on function or type of expenditure), which
treats all fixed and variable items as one
whole group together.
Separating Fixed and Variable
Costs
What for (Purposes)? See Page 3-5.
How to (Methods)?
High and Low Points method.
Scattergraph method.
Least Square method.
Based of what (the data type)? Historical
data.
Separating Fixed and Variable
Costs
Must stay objective in using historical
data, by:
Excluding any extraordinary or abnormal or
unusual occurrences from sample observed
Adjusting to reflect changes that are likely to
occur in the future during the forecasted
period.
Being aware of inflationary effects, if the
sample comes from several different years.
High and Low Points Method
Based on 2 data points (one is cost and
another one is activity being measured).
Assumption: both points fall on the true
variable cost line.
Pros:
Simple
Cons:
Can only handle 2 data points, resulting in biased
estimates of fixed and variable costs.
Based on assumption that other data points lie in
straight line between high and low points.
Scattergraph Method
Components of graph:
y-axis represents the cost being analyzed
(dependent variable)
x-axis represents the associated activity
(independent variable)
The data from each axis is plotted on the
graph
Scattergraph Method
Pros:
Utilizes all available data, not only 2 data
points.
Better visual aid to inspect relationship
between cost and activity.
Better visual aid to detect data points
abnormality.
Cons:
Cost line drawn is based on visual
interpretation.
Least Square Method
(Correlation Analysis)
Correlation = the measure of covariation
(relationship) between dependent and
independent variables.
2 measurements:
Coefficient of correlation.
Coefficient of determination.
Least Square Method
(Correlation Analysis)
Coefficient of correlation (r): measures the
extent of linear relationship between 2
variables.
r=0 : no correlation
r = 1 : correlation exists, either positive
or negative
Least Square Method
(Correlation Analysis)
Coefficient of determination (r2): measures
the percentage of the variations in the
dependent variable are related to (but
not necessarily caused by) the variations
in the dependent variable.
The high and low points method has the
advantage of being simple to compute, but it
has the disadvantage of using only two data
points in the computation, thereby resulting in
a significant potential for bias and inaccuracy
in cost estimates. The scattergraph has the
advantage of using all of the available data,
but it has the disadvantage of determining the
fixed and variable components on the basis of
a line drawn by visual inspection through a
plot of the data, thereby resulting in bias and
inaccuracy in cost estimates. The method of
least squares has the advantage of accurately
describing a line through all the available
data, thereby resulting in unbiased
estimates of the fixed and variable elements
of cost, but it has the increased disadvantage
of computational complexity
Exercises
Do:
E3-1 GOOD
(High and Low) LUCK!!!
E3-4
(Least Square)