Cost Segregation Note
leLECTURE 5a
Cost Estimation/Segregation Techniques
Cost estimation is a term used to describe the measurement of historical cost so as to be able to predict future costs for management decision making. That is, historical information is analyzed to provide estimates on which to base future operational To do cost estimation, it is important for the Accountants to be able to ascertain the activity level as well as cost drivers which exert main influence on the company activity. A cost driver is any factor whose change causes a change in the total cost of the operations of an activity. Some examples of cost drivers are: (a) direct labour hours (b) machine hours (c) Units of output and (d) Number of production runs
In some cases, there are mixed costs. That is, such costs have both fixed and variable elements that would need to be segregated.
METHOD OF SEGREGATING MIXED COSTS INTO FIXED COST AND VARIABLE COSTS
Mixed costs can be separated into their fixed and variable elements, using a number of methods which include: (i) The accounts classification method (ii) The high-low method (iii) The scatter graph (iv) The linear regression analysis (v) The multiple regression analysis
Account Classification Method
This is a subjective way of segregating the mixed cost into fixed and variable element. It is usually based on the personal experience of the accountant. This method requires that the the accountant inspect each item of expenditure within the accounts for some output level, and then classify each item of expenses as a wholly fixed, variable or semi- variable cost.
High-Low Method
This represents an objective way of segregating the mixed cost into fixed and variable elements. It involves the following procedure- (i) Identify the highest and least activity levels among the observed data. (ii) Ascertin the difference between the two activity levels (iii) Identify the corresponding
Cost Estimation/Segregation Techniques
Cost estimation is a term used to describe the measurement of historical cost so as to be able to predict future costs for management decision making. That is, historical information is analyzed to provide estimates on which to base future operational To do cost estimation, it is important for the Accountants to be able to ascertain the activity level as well as cost drivers which exert main influence on the company activity. A cost driver is any factor whose change causes a change in the total cost of the operations of an activity. Some examples of cost drivers are: (a) direct labour hours (b) machine hours (c) Units of output and (d) Number of production runs
In some cases, there are mixed costs. That is, such costs have both fixed and variable elements that would need to be segregated.
METHOD OF SEGREGATING MIXED COSTS INTO FIXED COST AND VARIABLE COSTS
Mixed costs can be separated into their fixed and variable elements, using a number of methods which include: (i) The accounts classification method (ii) The high-low method (iii) The scatter graph (iv) The linear regression analysis (v) The multiple regression analysis
Account Classification Method
This is a subjective way of segregating the mixed cost into fixed and variable element. It is usually based on the personal experience of the accountant. This method requires that the the accountant inspect each item of expenditure within the accounts for some output level, and then classify each item of expenses as a wholly fixed, variable or semi- variable cost.
High-Low Method
This represents an objective way of segregating the mixed cost into fixed and variable elements. It involves the following procedure- (i) Identify the highest and least activity levels among the observed data. (ii) Ascertin the difference between the two activity levels (iii) Identify the corresponding