Mixed Cost Separation

Approaches:
1. Scatter diagram
2. Account analysis
3. Engineering approach
4. High-low method
5. Least-square regression model

Example:
Barilgaon Company’s total overhead costs at various activity levels are presented below:
Month Units produced Total overhead cost

January 320 Tk. 13,000

February 270 11,750

March 400 15,000

April 380 14,500

May 450 16,250

June 500 17,500

Required:
a) Separate the above cost into variable and fixed elements using high-low method and
least-square regression model.
b) Determine the cost of producing 550 units in July using both models.

High-Low Method:
Per unit variable cost = (High cost – Low cost)/(High activity – Low activity)

= (17,500 – 11,750)/(500 – 270)

= 5,750/230

= 25
Total fixed Cost = Total cost – Total variable cost

= 13,000 - 320×25

= 5,000

Cost of July = 5,000 + 550×25

= 18,750
Least-Square Regression Model:

Units
Month Cost (y) xy x2
(x)
January 320 13,000 4160000 102400
Februar
270 11,750 3172500 72900
y
March 400 15,000 6000000 160000
April 380 14,500 5510000 144400
May 450 16,250 7312500 202500
June 500 17,500 8750000 250000
3490500
 Total 2320 88,000 932200
0

Per unit variable cost, b = (n∑xy - ∑x*∑y)/{n∑x2- (∑x)2}

= (6×34,905,000 – 2,320×88,000)/{6×932,200 – (2,320)2}

= (209,430,000 – 204,160,000)/(5,593,200 – 5382400)

= 5,270,000/210,800

= 25

Fixed cost, a = (∑y - b∑x)/n

= (88,000 - 25×2,320)/6

= (88,000 – 58,000)/6

= 30,000/6

= 5,000