Account Analysis Method of Cost Estimation

By Utilizing account analysis, the accountant classifies and examines each ledger account like variable mixed or fixed. Into their variable and fixed components mixed accounts are broken down. They base these classifications on experience, inspection of cost behaviour for some past durations or intuitive feelings of the manager.

Example

Management has estimated of Shs.1,090 variable costs, of Shs.1,430 fixed costs to create 100 units employing 500 machine hours. As machine hours drives variable costs in our example, the variable cost stated like

After that we get the total cost equation like

Y = ,1430 +2.18 x

Whereas y = net cost

               x = number of machine hours

Utilizing for 550 machine hours

Net cost = Shs.1, 430 + Shs. 2.18 (550)

= 1,430 + 1,999

= Shs.2, 629

This analysis must find out whether any factors apart from the output machine hours are influencing net cost.

A danger in utilizing this method lies there is actually many managers may assume a cost's behaviour with no further analysis.  This is as like the method is highly subjective.