What are the four methods commonly used to identify the fixed and variable elements of a...

What are the four methods commonly used to identify the fixed and variable elements of a mixed cost? and Identify the strength and weakness of each method identified.

Expert Solution

The four methods which are commonly used to identify fixed and variable component of mixed cost are as follows along with their strength and weaknesses:

1. High low point method -

Strength - It is easy and quick method to determine fixed and variable cost. Even with incomplete data, accountant can use this method.

Weakness - The high low method could produce inaccurate figures. This method ignores all data in between extremes and it is based on the assumption that no foreign cost will incur in the production.

2. Scatter graph method - This method segregates total cost graphically.

Strength - It shows relationship between two variables. The range of data flow i.e. maximum and minimum can be easily determined. Plotting the data is relatively simple. Observation and reading is straightforward.

Weakness - This method can not give exact extent of correlation. This method does not show exact relation between two variables and it can show you relationship only between two variables.

3. Least squares regression method - This method is based on the technique for estimating relation between variables.

Strength - This method is very east to explain and understand. This method can be applied to any applications. This method makes very efficient use of the data. Good results can be obtained with relatively small data sets.

Weakness - It is limited to liner relationship. It is affected by outlier. This method is very much rigid in the sense that if any change in made in the series, it will need through revision of the trend equation to fit a trend line and find the trade values.

4. Accounting analysis method - This is a method of estimating cost associated with the product.

Strength - This method is based on the estimation and prior experience. So this method is very easy to use and cheap. From this method, we can segregate cost between fixed and variable easily.

Weakness - As this is based on estimation, results will not be accurate. Any change in assumption will lead to wrong results.

ekkarill92 answered 1 year ago

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