10.methods of cost variability

8/2/2019 10.Methods of Cost Variability

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Methods of Cost

Variability

By

RAHUL SINGH

MBA-IB

Roll No : 49


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Methods of CostVariability

Comparison MethodUnder this method, the quantum of output at two

different levels of activity is compared with correspondingamount of semi-variable costs. As fixed cost remains

constant, variable cost is determined by applying thefollowing ratio:-

Variable Cost Per Unit =Change in Semi-Variable Cost / Change in Volume of Output


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Problem:-

Months Production

(Units) ( x )

S.V.Cost

(Rs.) ( y )

January, 2007 200 2,000

February 150 1,750

March 250 2,250

April 300 2,500

May 400 3,000

June 500 3,500


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Segregation of Semi Variable Cost

Month Production

(Units)

S.V.Cost

(Rs.)

VariableCost (Rs.)

FixedCost (Rs.)

April,2007 300 2,500 1,500 1,000May,2007 400 3,000 2,000 1,000

Change 100 500

Variable Element of Cost Per Unit= 500/100

= Rs. 5 Per Unit


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The High & Low Points orRange Method

This method is similar to the comparison method except that thedata relating to the highest and lowest level of activity areconsidered

Month Production(Units)

S.V.Cost(Rs.)

VariableCost(Rs.)

FixedCost(Rs.)

Feb. 150 1750 750 1,000

June 500 3500 2500 1,000

Change 350 1750


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Average Method

Under this method of segregation of fixed and variableelements of cost, first the average of the data relating toselected two levels of activity is calculated and then the

range method is applied.

Months Average Production Average S.V. Cost

First 2 Months (200+150)/2 =175 (2000+1750)/2 = 1875

Last 2 Months (400+500)/2= 450 (3000+3500)/2 = 3250

Change 275 1375


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The Equation Method

Under this method, variable and fixed element of semi-variable cost is determined by means of straight lineequation.

y = mx + cWhere, y = Total semi-variable cost

x = Output (in units)

m = Variable Cost per unitc = Fixed Cost Element


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Least squares method

This method is considered as most effective & accuratemethod to segregate semi-variable cost into fixed andvariable elements. It is a statistical method based on the

linear equations :y = mx + c

ory = mx + Nc

andxy = mx2+ cx

Where, y = Total semi-variable costx = Output (in units)

m = Variable Cost per unit

c = Fixed Cost Element

N = Number of observations


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The Graphical Method(Scatter Diagram)

Under this method of segregating semi variable costsinto fixed and variable elements, all relevant given dataare plotted on a scatter graph .

1. The volume of production is plotted on the horizontal axis andsemi-variable cost on vertical axis.

2. Corresponding to the volume of production, points of semi-variable costs are drawn.

3. A line of best fit is drawn from the plotted points in such a way thatthe fair average relationship between volume of production andcost is established. Point falling far away from the line of best fitare abnormal and, hence, should be ignored.


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5000

4000

3000

2000

1000

100 200 300 400 500

Variable Cost

Fixed Cost

Volume of Production in Units

Semi Variable Cost

Total Semi-Variable Cost Line

0


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The Graphical Method(Scatter Diagram)

4. The point where best fit (total semi-variable cost line) intercepts

the vertical axis is the fixed cost. From this point, a line parallel to

the horizontal axis is drawn to show fixed cost line.

5. The slope of the total semi-variable cost line known as the line of

best fit determines the variable elements. The variable cost at any

level of activity can be ascertained from the difference between

the fixed cost line and total cost line.


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Analytical Method

Based on careful analysis of each item todetermine how far the cost varies withvolume.

Analyst determines from the past experienceas to what portion of semi-variable costscomprises of variable cost element and fixed

cost element. Simple method but suffers from the

subjectivity of the accountant or the analyst.


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THANK YOU!


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10.methods of cost variability

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