SY, Corwin Edrian G.

BSA 3A

There are three widely used methods of separating mixed costs into their fixed and variable components: the high-low
method, the scattergraph method, and the method of least squares.

1. High-low method

In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited
amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and
comparing the total costs at each level.

If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and
variable costs by solving the system of equations. It is worth being cautious when using the High-Low Method, however,
as it can yield more or less accurate results depending on the distribution of values between the highest and lowest
dollar amounts or quantities.

2. Scattergraph method

The scattergraph (or scatter graph) method is a visual technique used in accounting for separating the fixed and variable
elements of a semi-variable expense (also called a mixed cost) in order to estimate and budget for future costs. A semi-
variable expense is more complicated to analyze since it is made up of both fixed and variable factors.

A scattergraph uses a horizontal x-axis that represents a firm's production activity and a vertical y-axis that represents its
cost. Data are plotted as points on the graph, and a regression line that runs through the dots represents the best fit of
the relationship between the variables.

3. Method of least squares

The least-squares method is a form of mathematical regression analysis used to determine the line of best fit for a set of
data, providing a visual demonstration of the relationship between the data points. Each point of data represents the
relationship between a known independent variable and an unknown dependent variable.

The least-squares method is a statistical procedure to find the best fit for a set of data points by minimizing the sum of
the offsets or residuals of points from the plotted curve. Least squares regression is used to predict the behavior of
dependent variables. The least-squares method provides the overall rationale for the placement of the line of best fit
among the data points being studied.

This method of regression analysis begins with a set of data points to be plotted on an x- and y-axis graph. An analyst
using the least-squares method will generate a line of best fit that explains the potential relationship between
independent and dependent variables.

The least-squares method provides the overall rationale for the placement of the line of best fit among the data points
being studied. The most common application of this method, which is sometimes referred to as "linear" or "ordinary,"
aims to create a straight line that minimizes the sum of the squares of the errors that are generated by the results of the
associated equations, such as the squared residuals resulting from differences in the observed value, and the value
anticipated, based on that model.

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