Visual Fit Method of Cost Estimation

Cost estimation is based on past data regarding the dependent variable and the cost driver. The previous data on cost levels and the output levels is plotted on a graph named as a scatter graph and a line of best fit is drawn as displayed in the diagram. A line of best fit is a line drawn so like to cover the most points possible on a scatter graph. Its intersection along with the vertical axis shows the fixed cost while the gradient shows the variable cost per unit.

Example: 

Assume a firm has net costs of 8 meter, 4 meter and 1 meter respectively while the output units are as 400,000, 200,000 and respectively. So estimate its cost equation by utilizing   the visual fit method.

Note : fixed cost = X₀ = 1_meter

            Gradient = Change in Y/ Change in X

                          = (Y₃-Y₂)/(X₃-X₂)

                          = Variable cost per unit

Variable cost per unit = Change in cost / Change in activity level

= (8 meter - 4 meter)/ (400,000 - 200,000)

= 20

Net cost equation y = 1 meter + 20 x

On the sources of the existing data, fixed cost is Shs 1 meter and the variable cost per unit is 20. On the sources of the developed model, estimates can be completed regarding future cost. When the activity level is 600,000 units, net cost will be estimated like:

TC = 1 Meter + 20 (600,000) = 1 Meter + 12 Meter = 13 Meter

Posted Date: 2/5/2013 4:10:56 AM | Location : United States

Ask an Expert

Related Discussions:- Visual fit method of cost estimation, Assignment Help, Ask Question on Visual fit method of cost estimation, Get Answer, Expert's Help, Visual fit method of cost estimation Discussions

Write discussion on Visual fit method of cost estimation
Your posts are moderated

Write your message here..

Related Questions

Typical causes of labour variances, Typical Causes of Labour Varian... Typical Causes of Labour Variances Labour Rate Variances a) Higher rates being paid than planned because of wage raise awards. b) Lower or Higher grade of work

Purchase cost and ordering cost, Ordering cost is incurred whenever the ... Ordering cost is incurred whenever the inventory is replenished. It includes costs associated with the processing and chasing of the purchase order transportation, inspec

Marginal costing.., importance of marginal costing &standing costing importance of marginal costing &standing costing

Exploration costs, are exploration cost treated as an asset or expense or b... are exploration cost treated as an asset or expense or both?

Why does rent control result in a shortage of rental unit, 1. Why does rent... 1. Why does rent control result in a shortage of rental units. 2. How does price elasticity of demand affect how much of a tax is passed on to the consumer and how much is absor

Behavioural aspects of standards, Behavioural Aspects of Standards Bud... Behavioural Aspects of Standards Budgets and Standards rely heavily on the people who have to work to meet them. Since the detailed nature of standard costing and its involvem

Calculate cost of debt and cost of preferred shares, You have been asked by... You have been asked by Mogul-Basher (MB) Ltd., a manufacturer of snowboards, to evaluate its capital structure. As a first step, you need to estimate MB's current weighted average

Cost sheet, what is wip what is wip

MATERIALCOSTING, what are the material management questions what are the material management questions

Cash cycle, The Cash Cycle: so as to deal with the problem of cash managem... The Cash Cycle: so as to deal with the problem of cash management we should have a concept about the flow of cash by a firm's accounts. The entire process of such cash flow is ide