Methods of Segregation Semi Variable Cost into Fixed Cost and Variable Cost

>> September 13, 2010


To segregate semi variable cost into fixed cost and variable cost is necessary because with this, we can add fixed cost proportion in total fixed cost and variable cost proportion in total variable cost. So, with following method, we can carry out this.

1. Graphical Method

With graphical method, we draw the graphic line of semi variable cost by taking output on x'ax and total semi variable cost at y'ax. After this, we do judgement and select a point where will be our fixed cost in semi variable cost. After this, we draw the line of best fit. This line shows the fixed cost which will not be changed after changing output.

2. High Points and Low Points Method

Under this method, we calculate total sale and total cost at highest level of production. Then we calculate total sale and total cost at lowest level of production. Because, semi variable cost have both variable and fixed cost. We first calculate variable rate with following formula :

=  Excess of total cost  / Excess Sale X 100

This rate shows variable cost of sale value. By using this rate, we also calculate variable cost of sale at highest level. Now, same variable cost will be deducted from total cost at the highest level of production. Reminder will be fixed cost.

For example

sale at higest highest level of production 140000
sale at lowest level of production 80000
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Excess sale =  60000
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total cost at highest level of production 72000
total cost at lowest level of production 60000

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Excess cost = 12000
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Variable cost rate = 12000/60000 X 100 = 20% of sale

Variable cost at highest level of production = 140000 X 20% = 28000

Fixed cost = Rs. 72000 - Rs. 28000

= Rs. 44000

3. Analytical Method

Under this method, cost accountant does some analysis for dividing semi variable cost into fixed cost and variable cost. After this, he calculate fixed cost on that rate which analyzed. Suppose, a cost accountant says that in the total semi variable cost, there may be 30% fixed cost and  70% variable cost. Now total semi variable cost will be divided on this basis.

If production level will increase, variable cost's proportion will increase with same rate. But fixed cost will not change.

4. Level of Activity Method

In this method, we compare two level of production with the amount of expenses in these levels.

Variable cost will be calculated with following method

Change in semi variable cost / Change in production volume

5. Least Square Method

This is statistical method in which we use this method for calculating a line of best fit. This method is based on the linear equation y = mx +c , y is total cost, x is volume of output and c is total fixed cost. By solving this equation mathematically, we can calculate variable cost(M) at different level of production.





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2 comments:

masadvisor September 16, 2010 at 10:01 AM  

Thanks for the information, we will add this story to our blog, as we have a audience in this sector that loves reading like this find accounting software .

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