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Mixed Cost

The document discusses different types of costs: fixed costs remain constant regardless of changes in output, variable costs change proportionally with output, and mixed costs have both fixed and variable components. It provides equations to model total cost as a function of fixed and variable cost components. Methods for identifying fixed and variable costs in a mixed cost function are described, including scatter graphing, the high-low method, and regression analysis. Capacity, practical capacity, flexible vs. committed resources are also defined.

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Peter Wagdy
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695 views4 pages

Mixed Cost

The document discusses different types of costs: fixed costs remain constant regardless of changes in output, variable costs change proportionally with output, and mixed costs have both fixed and variable components. It provides equations to model total cost as a function of fixed and variable cost components. Methods for identifying fixed and variable costs in a mixed cost function are described, including scatter graphing, the high-low method, and regression analysis. Capacity, practical capacity, flexible vs. committed resources are also defined.

Uploaded by

Peter Wagdy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Cost behavior STEP COST

Fixed Cost: A cost that stays the same in


total as output changes is a fixed cost but
varies per unit inversely.
‫الزتونة‬ ■ Step-costs exhibit a discontinuous
behavior pattern.
■ Step-costs are constant for a certain
range of output, then jump to another
A variable cost is a cost that, in total, level, remaining constant again over a
varies in direct proportion to changes in output certain range of output
but fixed per unit.

A mixed cost is a cost that has both a fixed Mixed Cost


Total Cost = Fixed Cost + Variable Cost per unit x Activity Level
and a variable component.
Y = a + b X
Capacity amount of an activity a company can perform
Practical Capacity the level at which a company can perform In this equation,
efficiently. Y = The total mixed cost (dependent variable)
a = The total fixed cost (the vertical intercept
Flexible resources are resources acquired as used and needed. of the line)
(DM) (Quantity supplied = Quantity demanded = no excess capacity) b = The variable cost per unit of activity (the
slope of the line)
Committed resources are supplied in advance of usage. (Buying
X = The level of activity (Independent
or leasing a building), (Quantity supplied ≠ Quantity demanded =
Variable)
excess capacity)

Fixed cost function (Y = a)


Variable cost function (Y = b X)
Mixed Cost Function ( Y = a + b X)

Identifying the fixed and Variable elements of Mixed cost


1- Scatter graphing.
2- High – Low method.
3- Regression analysis.
---------------------------------------------------------  --------------------------------------------------------
High – Low Method
Review Problem 1: High-Low Method
The administrator of Azalea Hills Hospital would like a cost formula linking the administrative costs involved in
admitting patients to the number of patients admitted during a month. The Admitting Department’s costs and the number
of patients admitted during the immediately preceding eight months are given in the following table:

Required:
1. Use the high-low method to estimate the fixed and variable components of admitting costs.
2. Express the fixed and variable components of admitting costs as a cost formula in the form Y = a + bX.
Solution
1. The first step in the high-low method is to identify the periods of the lowest and highest activity.
Those periods are November (1,100 patients admitted) and June (1,900 patients admitted).

2- The second step is to compute the variable cost per unit using those two data points:

‫حفظ‬

3- The third step is to compute the fixed cost element by deducting the variable cost element from the total cost at either
the high or low activity. In the computation below, the high point of activity is used:

Example
Kaylin Manufacturing Company has three salaried accounts payable clerks responsible for processing purchase
invoices. Each clerk is paid a salary of $30,000 and is capable of processing 5,000 invoices per year (working
efficiently).
In addition to the salaries, Kaylin spends $9,000 per year for forms, postage, checks, and so on (assuming
15,000 invoices are processed). During the year, 12,500 invoices were processed.
Required
1. Calculate the activity rate for the purchase order activity. Break the activity into fixed and variable
components.
2. Compute the total activity availability, and break this into activity usage and unused activity.
3. Calculate the total cost of resources supplied, and break this into activity usage and unused activity.

Answer

Example (2)
Kim Wilson, controller for Max Enterprises, has decided to estimate the fixed and variable components
associated with the company’s shipping activity. She has collected the following data for the past six months:
Required
1. Estimate the fixed and variable components for the shipping costs using the high-low method. Using the
cost formula, predict the total cost of shipping if 14 packages are shipped.

Answer

Scatter graphing
- Allows you to see the data BUT It lacks any objective criterion for choosing the best-fitting line

Least Squares
- Percentage of variability in dependent variable explained by independent variable
- Range: 0 – 1
- Higher is better

Multiple Regression
- Multiple regressions uses 2 or more independent variables (variable costs) in addition to the y-intercept
(fixed cost) to explain the dependent variable.

Managerial Judgment
- Is a method of cost assignment used to
- Determine fixed, variable cost
- Uses managerial experience
- Uses past observation of cost relationships
- To refine statistical estimation results
- Advantage: simplicity
-Disadvantage: judgment errors
Every Activity has:
- Time Horizon
- Recourses ( Material , Labor, Capital)

Sarbanes Oxley

 Enhanced the role of the management accountant by

1- Establishing controls over management


2- Raising importance of management’s assessment of internal controls

Certifications

1- Signifies the accountant has met requirements for Education and Experience
2- Signifies the accountant has passed a qualifying examination

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