Methods of Cost Variability
Methods of Cost Variability
The Methods * The Comparison Method * High and Low Point or Range Method * The Equation Method * The Average Method * The Graphic Method (Scatter diagram) * The Method of Least Squares * The Analytical Method or Degree of Variability Method
Illustration
From the following month-wise information in respect of semi-variable costs of a firm, segregate the cost into fixed and variable elements: Months2009 | Production (Units) | Semi Variable Cost (Rs.) | January | 200 | 2,000 | February | 150 | 1,750 | March | 250 | 2,250 | April | 300 | 2,500 | May | 400 | 3,000 | June | 500 | 3,500 |
The Comparison Method
Under this method, the quantum of output at two different levels of activity is compared with corresponding amount of semi-variable costs.
As fixed cost remains constant, variable cost is determined by applying the following ratio:
Variable cost per unit = Change in the amount of Semi-Variable Costs/Change in volume of Output
Taking the level of activity of any two months, say April and May, the variable and fixed elements of cost may be calculated as follows:
Variable cost per unit = Change in the amount of Semi-Variable Costs/Change in volume of Output
=500/100= Rs. 5 per unit
Therefore, Variable Element of Cost= 300*5 =Rs.1,500 (for April)
And, Fixed Element of Cost = Rs. 2,500-Rs. 1,500 =Rs. 1,000 (for April)
Similarly, Variable Cost for May=400*5=Rs.2 000 and Fixed Cost for May=3,000-2,000= Rs. 1,000
Month2009 | Production (Units) | S.V. Cost | Variable Element(Rs.) | Fixed Element (Rs.) | April | 300 | 2,500 | 1,500 | 1,000 | May | 400 | 3,000 | 2,000 | 1,000 | Change | 100 | 500 | | |
The High and Low Point or Range Method
This method is similar to the comparison method except that the data relating to the highest and lowest level of activity are considered.
The data of June (highest) and February (lowest) is considered:
Variable cost per unit = Change
The Methods * The Comparison Method * High and Low Point or Range Method * The Equation Method * The Average Method * The Graphic Method (Scatter diagram) * The Method of Least Squares * The Analytical Method or Degree of Variability Method
Illustration
From the following month-wise information in respect of semi-variable costs of a firm, segregate the cost into fixed and variable elements: Months2009 | Production (Units) | Semi Variable Cost (Rs.) | January | 200 | 2,000 | February | 150 | 1,750 | March | 250 | 2,250 | April | 300 | 2,500 | May | 400 | 3,000 | June | 500 | 3,500 |
The Comparison Method
Under this method, the quantum of output at two different levels of activity is compared with corresponding amount of semi-variable costs.
As fixed cost remains constant, variable cost is determined by applying the following ratio:
Variable cost per unit = Change in the amount of Semi-Variable Costs/Change in volume of Output
Taking the level of activity of any two months, say April and May, the variable and fixed elements of cost may be calculated as follows:
Variable cost per unit = Change in the amount of Semi-Variable Costs/Change in volume of Output
=500/100= Rs. 5 per unit
Therefore, Variable Element of Cost= 300*5 =Rs.1,500 (for April)
And, Fixed Element of Cost = Rs. 2,500-Rs. 1,500 =Rs. 1,000 (for April)
Similarly, Variable Cost for May=400*5=Rs.2 000 and Fixed Cost for May=3,000-2,000= Rs. 1,000
Month2009 | Production (Units) | S.V. Cost | Variable Element(Rs.) | Fixed Element (Rs.) | April | 300 | 2,500 | 1,500 | 1,000 | May | 400 | 3,000 | 2,000 | 1,000 | Change | 100 | 500 | | |
The High and Low Point or Range Method
This method is similar to the comparison method except that the data relating to the highest and lowest level of activity are considered.
The data of June (highest) and February (lowest) is considered:
Variable cost per unit = Change