Statistical Methods in Computer Science Data 2: Central Tendency & Variability Ido Dagan.
10.Methods of Cost Variability
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Transcript of 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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