Fixed Variable Costs Segregation

ACCA F2 - Management Accounting


In long run, no cost is fixed and for very short run every costs except material (assumption of JIT) are fixed.

Classification by nature

Ø  Fixed - cost is static for certain range of production in a period e.g. rent, minimum wage

Ø  Variable - cost varies with production level e.g. direct material for production, direct labour (direct labor is considered as fixed cost when accounting for total cost of business i.e. go to first line of this article)

Ø  Semi variable - defined minimum fixed cost element and variable cost element per unit with increasing production level e.g. electricity

Ø  Step  fixed  cost - here fixed cost changes for different range of production e.g. warehouse $20 (100-200unit), $40 (200-300unit), ….security, supervision

Ø  Step variable cost -  here variable cost changes for different range of production e.g. quantity discount of production material

Segregation of semi-variable cost into fixed and variable cost:

Semi-variable cost poses problem in estimating production cost. Segregating semi-variable cost is to identify break-even point. Thereafter, it also helps in calculating target profit. There are different tools to segregate semi-variable cost into variable and fixed element. They are:

Ø  Cost equation: y= a+bx , where Y= total semi-variable cost at defined activity level, a= fixed cost, b= variable cost and x= defined activity level

Ø  High/low analysis - Cost at high activity level and low activity level are selected and the cost difference is divided by difference in activity level which determines unit variable cost. Variable cost is then used to determine fixed cost using the equation. Y= a+bx

Ø  Line of best fit (scatter diagram): Scatter diagram is prepared by plotting costs for various activity level and creating a line of best fit through the cluster of points. The straight line drawn can be interpreted as cost equation.

Ø  Regression analysis: This technique helps to draw fixed and variable costs without using graphical technique. It accounts for all available cost and activities level. The elements of cost equation Y=a+bx for regression analysis is given by b=(n∑xy-∑x∑y)/(n∑x²-(∑x)²) and  a=(∑y/n)-(b∑x/n) where n is sample size

Cost behaviour