Question

Provide input on how to analyze Mixed Costs to distinguish variable vs fixed components

Answer 1

Answer-:

Cost is something that can be classified in several ways depending on its nature. One of the most popular methods is classification according to fixed costs and variable costs. Fixed costs do not change with increases/decreases in units of production volume, while variable costs are solely dependent on the volume of units of production. Fixed and variable costs are key terms in managerial accounting, used in various forms of analysis of financial statements.

The high-low method enables you to estimate variable and fixed costs based on the highest and lowest levels of activity during the period. Just follow three steps:

1. Based on a table of total costs and activity levels, determine the high and low activity levels.

Look at the production level and total costs to identify the high and low activity levels. Company’s highest production level occurred in May, when the company produced 1,300 units at a total cost of $126,000. The lowest production level occurred in January, when the company produced just 800 units costing $93,000.

Use the high and low activity levels to compute the variable cost
per unit.To figure out the variable cost per unit, divide the change in total cost by the change in activity:

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   BusinessAccountingUse the High-Low Method to Separate Mixed Costs into Variable and Fixed Components
   Use the High-Low Method to Separate Mixed Costs into Variable and Fixed Components
   
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   Managerial Accounting For Dummies
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   The high-low method enables you to estimate variable and fixed costs based on the highest and lowest levels of activity during the period. Just follow three steps:

   
   Based on a table of total costs and activity levels, determine the high and low activity levels.

   image0.jpg

   Look at the production level and total costs to identify the high and low activity levels. Xeon Company’s highest production level occurred in May, when the company produced 1,300 units at a total cost of $126,000. The lowest production level occurred in January, when the company produced just 800 units costing $93,000.

   Use the high and low activity levels to compute the variable cost
   per unit.

   To figure out the variable cost per unit, divide the change in total cost by the change in activity:

   
   image1.jpg

   Figure out the total fixed cost.

   To compute the total cost, pick either the high or the low cost information (either one works). Plug this information, along with the variable cost per unit from the preceding section, into the total cost formula.

   Based on your answer, you can determine that making 1,000 units would mean total variable costs of $66,000 (1,000 units x $66 per unit). Total fixed costs equal $40,200. Therefore, total costs would equal $106,200:

   Total cost = (Variable cost per unit x Units produced) + Total fixed cost

Total cost = ($66 x 1,000 units) + $40,200 = $106,200

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