3.1 Definition and Application of Cost Behaviour Concept
3.1 Definition and Application of Cost Behaviour Concept
3.1 Definition and Application of Cost Behaviour Concept
Fixed cost
Volume of output(x)
1
Step 1. Review records the costs in the past periods
Step 3. Calculate the variable cost per unit by dividing the difference
between the total cost at the lowest activity and total cost at
high activity by the difference between the highest and lowest
activity.
Step 4. Calculate the fixed cost by subtracting variable costs from the
total cost at either the lowest or highest activity.
Cost Function : Y = a + b x
Y= Total Cost; a = fixed cost ; b= variable cost per unit x= No. of activity level
Illustrative Example:
Dolfin Ltd has recorded the following total costs during the last five years
Required:
Calculate the total costs that should be expected in 2005 if output is 95,000 units.
SOLUTION:
Step
2 Total cost at high activity P 170,000
Total cost at low activity P 140,000
Total units at high
activity 90,000
Total units at low
activity 60,000
2
3
Total cost at high activity - total cost at low activity
Total units at high activity - total units at low activity
Step Fixed cost = Total cost @ high activity - total units @ high activity x variable cost
4 per unit
P170,000 - P(90,000 x 1)
= P80,000
Cost Function : Y = a + b x
Y = 80,000 + P1(x)
Y= 80,000 + P 1 (95,000)
Total Cost= P175,000
3
LEAST SQUARE METHOD
Illustrative Example:
Dolfin Ltd has recorded the following total costs during the last five years
Step 3. Calculate the variable cost per unit by using equation 2 and
3, using the elimination method.
Solution:
Step 2. Equation 2 ∑Y = n a + b ∑x
4
777 = 5 (a) + b (370)
Cost Function : Y = a + b x
Y = 79, 180 + 1.03 x
Y= 79, 180 +1.03 (95,000)
Total Cost= P177, 030
Note: Though the given data are the same, using HLM and least square
method usually do not arrive at exactly the same answer. Why?
In the HLM, we are only using two data (highest and the lowest) while the
least square method are using all the data given. Now, which do you think is
more accurate, is it the LHM or the LSM?