Question

2 (a). With detail examples, explain the methods of separating mixed cost into fixed and variable costs (3 marks)

Answer 1

Answer to question

three methods for separating mixed costs into their fixed and variable cost components:

1.)Prepare a scattergraph by plotting points onto a graph.

2.)High-low method.

3.)Regression analysis

Illustration on high low method

Company had total costs of electricity of $18,000 in the month when its highest activity was 120,000 machine hours. And During the month of its lowest activity there were 100,000 machine hours and the total cost of electricity was $16,000. This means that the total monthly cost of electricity changed by $2,000 when the number of machine hours changed by 20,000. This indicates that the variable cost rate was $0.10 per machine hour.

the total electricity cost was $18,000 when there were 120,000 machine hours, the variable portion is assumed to have been $12,000 (120,000 machine hours times $0.10). Since the total electricity cost was $18,000 and the variable cost was calculated to be $12,000, the fixed cost of electricity for the month must have been the $6,000. If we use the lowest level of activity, the total cost of $16,000 would include $10,000 of variable cost (100,000 machine hours times $0.10) with the remainder of $6,000 being the fixed cost for the month.

We can also sum by remaining two methdos but as for understanding and details example for students high low methdo is important.

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