Question

a) Explain any FOUR (4) methods in analysing the mixed cost.

Answer 1

Answer :

Mixed cost is a cost which consist of both variable cost and fixed cost.

Four methods for analyzing the mixed cost are as follows :

1. High and Low Points Method :

It is a mathematical technique used to split mixed cost into variable cost and fixed cost. In high & low cost method, a set of data is given for calculation of variable cost and fixed cost. Formula for calculation is

Variable cost per unit = (Highest activity cost - Lowest activity cost) / (Highest activity units - Lowest activity units)

Fixed cost per unit = Highest activity cost - (Variable cost per unit x Highest activity units) or

Lowest activity cost - (Variable cost per unit x Lowest activity units)

2. Least square regression analysis :

It is a statistical technique used to split mixed cost into variable cost and fixed cost. It is used to estimate linear total cost function using past data. Total cost function is

y = a + bx

where,

a = fixed cost at any level of activity

b = average variable cost per unit of activity

Formula for calculating a & b are

Unit Variable Cost (b) = [nΣxy − (Σx)(Σy)] / nΣx² − (Σx)²

Total Fixed Cost (a) = (Σy − bΣx) / n

where,

n is number of pairs of units–total-cost used in the calculation;
Σy is the sum of total costs of all data pairs;
Σx is the sum of units of all data pairs;
Σxy is the sum of the products of cost and units of all data pairs; and
Σx² is the sum of squares of units of all data pairs.

3. Scatter Graph method :

It is a graphical technique used to split mixed cost into variable cost and fixed cost. Mixed cost is split by plotting activity level along x-axis and total cost along y-axis and a regression line is drawn on the graph. Line which is drawn on graph is used to estimate total fixed cost and variable cost per unit.

Point where line intercept y axis is estimated fixed cost and slope of line is average variable cost per unit.

4. Account analysis :

In account analysis technique, a group of people review appropriate accounts and decide whether a particular cost is fixed cost or variable cost.

Total of all are fixed cost which are decided as fixed and total of all are variable cost which are decided as variable.