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COST SEGREGATION TECHNIQUES

GRAPHICAL REPRESENTATION OF COSTS

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MIXED COSTS

❑ are costs which could not be perfectly classified

as pure fixed costs no pure variable costs

❑ E.g.electricity, inspection, inter-department

services, water, employer contributions to
government agencies

METHODS IN SEGREGATING MIXED COSTS

❑ High-Low method

❑ Scattergraph method

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HIGH – LOW METHOD

❑ Is the traditional method of costs segregation.

This is sometimes called range analysis.

❑ This principle resides on the assumption that any

change in total costs is attributable to the change
in variable costs.

ILLUSTRATIVE EXAMPLE NO. 1

❑ The total maintenance costs of Gold Company in

the last four (4) months are presented as follows:
Maintenance
Month Machine hours Costs

January 7,200 450,000.00

February 6,800 422,000.00
March 7,000 440,000.00
April 6,400 418,000.00

❑The Company expects to use 7,400 machine hours

in May.

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PROCEDURES

❑STEP 1: Identify the highest activity/production

and its related costs.
❑ STEP 2: Identify the lowest activity / production
and its related costs.
Maintenance
Month Machine hours Costs

January 7,200 450,000.00

February 6,800 422,000.00
March 7,000 440,000.00
April 6,400 418,000.00

PROCEDURES

❑STEP 3: Determine the difference between the

highest cost and the lowest costs. Changes in the
costs are said to be attributable to change in
variable costs.

Unit Variable costs = Change in Costs

Change in Activity base

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PROCEDURES

Machine Maintenance Unit Change in Costs 32,000

Hours Costs Variable Change in Activity
costs Base 800
Highest 7,200 450,000
Lowest 6,400 418,000
Variable cost per
800 32,000
unit is Php 40
Variable Maintenance
Machine Hours Costs Fixed Costs Costs
Highest 7,200 288,000.00 162,000.00 450,000
Lowest 6,400 256,000.00 162,000.00 418,000
800 32,000

ANSWER TO ILLUSTRATIVE EXAMPLE NO. 1

Variable costs (Php 40*7,400 MH) Php 296,000

Fixed Costs Php 162,000
Total Maintenance Costs Php 458,000

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PRACTICE DRILL 1

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SCATTERGRAPH METHOD

❑ Visual fit analysis

❑ Plots the observation on a graph and make an
analysis on the plotted observations
❑ This method uses the principles found in a
regression line
❑ A regression line is a straight line that depicts the
relationship of two variables ( x and y)

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REGRESSION LINE

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REGRESSION ANALYSIS

Y = a + bx

y = total cost
a = fixed cost
b = variable cost
x = no. of units sold / produced

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HOW TO DO SCATTERGRAPH

❑ Draw the “x” (horizontal) and “y” (vertical) axes

in the graph
❑ Plot the observed data on the graph
❑ Draw a straight line in the middle of the plotted
observation, where the total differences of the
points above the line is equal to the total
differences of the points above the line is equal to
the total points below the line

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HOW TO DO SCATTERGRAPH

❑ the point of origin is the value of “a” (fixed cost)

❑ Compute “b” (variable cost per unit) by choosing
two “y” (total cost) as Y1 and Y2.
❑ Determine the values of X1 and X2 from the
vertical line corresponding the points of Y1 and Y2
❑ The value of “b” (variable cost per unit) equals
the difference in the values of “y” divided by the
difference in the values of “x”

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PRACTICE DRILL 2

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HOW TO DO SCATTERGRAPH
Materials Handling Costs
No. of Materials 80,000.00
Month Shipments handling costs
70,000.00
January 50 45,000.00
February 60 52,000.00 60,000.00
March 90 70,000.00
April 70 55,000.00 50,000.00

May 40 37,000.00
June 60 58,000.00 40,000.00

July 45 45,000.00
August 55 54,000.00 30,000.00

September 65 50,000.00
October 80 60,000.00 20,000.00

November 75 58,000.00
10,000.00
December 70 60,000.00

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0 10 20 30 40 50 60 70 80 90 100

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HOW TO DO SCATTERGRAPH
Materials Handling Costs
80,000.00

70,000.00

60,000.00

50,000.00

40,000.00

30,000.00

20,000.00

10,000.00

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0 10 20 30 40 50 60 70 80 90 100

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HOW TO DO SCATTERGRAPH
Materials Handling Costs
80,000.00

70,000.00

60,000.00

50,000.00

40,000.00

30,000.00

20,000.00

10,000.00

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0 10 20 30 40 50 60 70 80 90 100

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HOW TO DO SCATTERGRAPH
Materials Handling Costs
80,000.00

70,000.00

60,000.00

50,000.00

40,000.00

30,000.00

20,000.00

10,000.00

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0 10 20 30 40 50 60 70 80 90 100

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COST OF SALES
VS
COST OF GOODS SOLD

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ABC COMPANY, INC.

STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31 ,2022

Beginning Inventory 1,500,000

Sales 10,000,000 Add: Purchases 2,170,000
Cost of Sales (2,750,000) Total Goods available for sale 3,670,000
Gross Profit 7,250,000
Selling expenses (1,250,000)
Less: Ending Inventory 920,000
Administrative expenses (520,000) Cost of sales 2,750,000
Income before tax 5,480,000
Income tax expense (1,644,000)
Net income 3,836,000

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Raw materials, beginning 10,000

DEF COMPANY, INC. Add: Purchases 1,000,000
STATEMENT OF COMPREHENSIVE INCOME Total cost of raw materials available for use 1,010,000
FOR THE YEAR ENDED DECEMBER 31 ,2022 Less: Raw materials, end (50,000)
Total cost of raw materials used in production 960,000
Direct Labor 120,000
Factory Overhead
Sales 10,000,000 Factory supplies 15,000
Cost of good sold (2,145,000) Light, power and water 20,000
Gross Profit 7,855,000 Repairs and maintenance 25,000
Provisions 35,000
Selling expenses (1,750,000) Depreciation 45,000
Administrative expenses (820,000) Insurance 25,000
Income before tax 5,285,000 Total manufacturing cost 1,245,000
Income tax expense (1,585,500) Add: work in process, beginning of year 75,000
Less: work in process, end of year (50,000)
Net income 3,699,500
Cost of goods manufactured 1,270,000
Add: finished goods, beginning 1,000,000
Total goods available for sale 2,270,000
Less: finished goods, ending (125,000)
Cost of goods sold 2,145,000

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PRACTICE DRILL 3 and 4

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