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When you are given a manufactured overhead costs how do you separate that into fixed and...

When you are given a manufactured overhead costs how do you separate that into fixed and variable overhead costs?

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There are 4 methods for separating cost into fixed and variable cost - (1)Industrial engineering method (2) Account inspection method, (3)scatter graph method,(4)High and low method.

Industrial engineering method: This method is used by an organisation when it is starting a new activity. This method helps in collecting cost information which is not available in organisation records.This method is applied to material and labour costs which represent a large portion of total output cost.If the relationship between material and labour inputs and outputs remain constant then these costs estimates can be used in future without any making adjustments significantly.

Account inspection method: This method involves examining each account and classifying the accounts total cost into either fixed cost or variable cost.This requires the management accountant to inspect each item of expenditure in the ledgers at a given level of output.

Scatter graph method: Under this method, you should plot several observed levels of cost and their respective activity levels on a scatter graph and apply statistical analysis and then attach the points making a line. This method is mostly used by small companies which don’t have expertise and knowledge to use complicated statistical analysis.

High and low method: Here we consider the highest and lowest volumes of output and relevant costs.

Variable cost per unit = difference of cost ( at two different levels) dividend by difference in output units ( at two different levels).

After arriving variable cost per unit, it is easy to calculate total variable cost by multiplying the number of units and variable cost per unit.

Fixed cost = total cost minus variable cost.

Fixed cost remain constant at all levels of activity.

ekkarill92 answered 2 years ago
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