CLASSIFYING COSTS

Kristelle Joyce L. Sotero

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 THESE ARE THE TALKING POINTS

Variable Costs Fixed Costs

Mixed Costs
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 Cost Behavior
Variable Cost Fixed Costs
They are the costs that change as the quantity of At whatever level of production within the
the goods produced changes. Total amount of the relevant range, this cost does not change. It is
variable costs is dependent to the level of independent of the level of production.
production
Examples:
Examples: • Rent of Facilities
● Cost of materials • Depreciation of Equipment
● Cost of direct labor computed per piece
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 Variable Costs Fixed Costs
• Constant on a per unit basis • Constant when presented as a total
• Varies when presented as a total. • Varies on a per unit basis

Assume an entity’s normal manufacturing process with a range of 5,000 to 7,000 units of goods with
a variable cost per unit of P20 and P15,000 fixed costs.
VC/unit Total variable Fixed costs FC/unit
costs
At 5,000 units P15,000 P3.00
At 5,000 units P20 P100,000
At 6,000 units P15,000 P2.50
At 6,000 units P20 P120,000
At 7,000 units P15,000 P2.14
At 7,000 units P20 P140,000
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 Cost Behavior
Cost Equation How much is the total cost to manufacture
products with a variable manufacturing cost per
unit of P25 and the total manufacturing fixed cost
of P40,000 at the following production levels:
y = total cost
a) 2,000 units
a = total fixed cost
b) 4,500 units
b = variable cost per unit c) 7,250 units
x = volume of activity
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 Cost Behavior
How much is the total cost to manufacture
products with a variable manufacturing cost per
unit of P25 and the total manufacturing fixed cost
of P40,000 at the following production levels:
a) 2,000 units
b) 4,500 units
c) 7,250 units
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 Cost Behavior
Mixed Costs
Refers to costs that has both variable and fixed components.

Examples:
● Utilities, since these are charged with a base amount and goes higher
with any usage over the base amount.
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 and Variable Costs

Thricia Mae L. Mondiren

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 Three Methods in Separating Fixed and
Variable Costs

Least Squares Regression

High - Low Method
Method

Scatter Diagram
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 High - Low Method
Mr. A Company builds tabletop replicas of some of the most famous tourist attractions in Seoul. The
company is highly automated where maintenance costs shows as a significant expense. The owner
decided to use machine hours as the basis of predicting maintenance costs and has gathered the
following data for the following eight weekly operations:
Week Machine Hours Maintenance Cost

1 3,000 P 9,800

2 4,500 12,900

3 8,000 18,100
4 6,000 13,500

5 9,000 24,800

6 3,500 10,400

7 5,500 13,000
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8 7,000 16,000
 Using the least squares regression method, determine the following:

a) Variable cost per unit

b) Total fixed cost
c) Total expected maintenance cost on 8,200 machine hours.
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 High - Low Method
Step 1: Determine the highest and lowest activity and the costs associated there unto.
Week Machine Hours Maintenance Cost
1 3,000 P 9,800

2 4,500 12,900

3 8,000 18,100
4 6,000 13,500

5 9,000 24,800

6 3,500 10,400

7 5,500 13,000

8 7,000 16,000
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 High - Low Method
Step 2: Obtain the variable cost per unit by dividing the change in cost over the change in activity.

VC/unit
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 High - Low Method
Step 3: Obtain the total fixed costs by removing the variable cost component in the total costs.

Highest Activity Lowest Activity

Total Cost P24,800 P9,800
Less: Variable Cost Component
High 9,000mh x P2.50/mh 22,500
Low 3,000mh x P2.50/mh 7,500
Fixed Cost P2,300 P2,300
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 High - Low Method
How much is the total maintenance cost on 8,200 machine hours?
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 Least Squares Regression Method
Mr. A Company builds tabletop replicas of some of the most famous tourist attractions in Seoul. The
company is highly automated where maintenance costs shows as a significant expense. The owner
decided to use machine hours as the basis of predicting maintenance costs and has gathered the following
data for the following eight weekly operations:
Week Machine Hours Maintenance Cost

1 3,000 P 9,800

2 4,500 12,900

3 8,000 18,100
4 6,000 13,500

5 9,000 24,800

6 3,500 10,400

7 5,500 13,000
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8 7,000 16,000
 Using the least squares regression method, determine the following:

a) Variable cost per unit

b) Total fixed cost
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 Least Squares Regression Method

Prepare a table calculating x (activity), y (total cost), xy, and x².

Week x y xy x²
Where n = 8
1 3,000 9,800 29,400,000 9,000,000
x̄ = 5,812.5
2 4,500 12,900 58,050,000 20,250,000 ȳ = 14,812.5
3 8,000 18,100 144,800,000 64,000,000
4 6,000 13,500 81,000,000 36,000,000
5 9,000 24,800 223,200,000 81,000,000
6 3,500 10,400 36,400,000 12,250,000
7 5,500 13,000 71,500,000 30,250,000
8 7,000 16,000 112,000,000 49,000,000
SUM 46,500 118,500 756,350,000 301,750,000
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 Least Squares Regression Method
Compute for the Variable Cost per Unit.
Week x y xy x²
SUM 46,500 118,500 756,350,000 301,750,000

Where n = 8
x̄ = 5,812.5
ȳ = 14,812.5
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 Least Squares Regression Method
Compute for the fixed cost.

x̄ = 5,812.5
ȳ = 14,812.5 a = 14,812.5 – 2.15 (5,812.5)
b = 2.15
a = 2,315.63
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 Let’s compare…

HLM LSRM

Variable cost per unit P 2.50 P 2.15

Total Fixed Cost P 2,300.00 P 2,315.63

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 Scatter Diagram Method
Graphical technique of separating fixed and variable
components of mixed cost by plotting activity level
along x-axis and corresponding total cost (i.e. mixed
cost) along y-axis.

● A regression line is drawn on the graph by visual

inspection.
● The line thus drawn is used to estimate the total
fixed cost and variable cost per unit
● The point where the line intercepts y-axis is the
estimated fixed cost and the slope of the line is
the average variable cost per unit.
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 Scatter Diagram Method
Example:

● Company A decides to use scatter graph to split its factory overhead (FOH) into variable and fixed
components. Following is the data which is provided for the analysis.
Month Units FOH
1 1,520 P36,375
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800
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 Scatter Diagram Method
● Step 1: Draw a scatter graph Variable Cost per Unit
● Step 2: Draw regression line
● Step 3: Find total fixed cost = Slope of
● Step 4: Find variable cost per Regression Line
unit
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 Scatter Diagram Method
Month Units FOH
1 1,520 P36,375
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800

Fixed Cost = y-intercept = P18,000

Variable Cost per Unit = Slope of Regression Line
x₁ 0 x₂ = 3,500 y₁ = 18,000 y₂ = 68,000
Variable Cost per Unit = (68,000 – 18,000) ÷ (3,500 – 0)
= P14.29
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 THANK YOU!!!
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