Visual fit method of cost estimation, Cost Accounting

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.

363_Visual Fit Method of Cost Estimation.png

Note : fixed cost = X0 = 1meter

            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







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
Related Questions
mojor elements of cost sheet

Principles of Marginal Costing The principles of marginal costing are as given: 1. Period fixed costs are similar, for any volume of sales and production provided suc

Consider as Illustration. Profit and loss account of TIL demonstrates, that, operations have given gross addition of Rs. 360 million to funds throughout the period. These funds sho

What is the easiest of calculate equivalents before producing a process account 2

LaNora White received her accounting degree in 1992. Since graduating, she has obtained significant experience in a variety of job settings. Her skills include auditing, income and

Use a selected company or your current work environment to identify at least one cost or expense that would fit under each of the following categories: • Variable • Fixed • Mixed •

Attainable Standards and Current Standards Although the standard must be set high sufficient that achievable and it has to be worked for. Attainable standards must provide a c

Pauline's Pastry Shop decides to remodel its offices this year. As part of the remodeling, Pauline's trades furniture with a cost of $12,000 that had been expensed in the year of p

Facts:   James (age 58, SS# 123-34-4439) and Martha (age 56; SS# 233-23-9050) Williams are married. James works at a major retailer as manager of the early shift. Martha is a nu

First in First Out or FIFO FIFO method is based upon the assumption such stock purchased first is issued first. Prices of stock purchased first are employed to determine the v