Visual fit method of cost estimation, Cost Accounting

Assignment Help:

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


Related Discussions:- Visual fit method of cost estimation

Sources of funds, We have noticed that working capital is needed to finance...

We have noticed that working capital is needed to finance that portion of current assets that is not financed through current liabilities. We also noticed that the investments repr

Determine the cost that changes in total proportionately, Presented below i...

Presented below is a list of terms relating to cost behavior, followed by definitions of those terms: a. Rent on a factory building b. Engineering approach c. Fixed cost

Cost and budget, #questionFrame-it Ltd is a manufacturer of metal picture f...

#questionFrame-it Ltd is a manufacturer of metal picture frames. The firm''s two product lines are designate S (small frames: 12 x18 cm) and L (large frames: 20 x 25 cm). The prima

Cost accounting, Cost accounting as a descriptive or analytical discipline

Cost accounting as a descriptive or analytical discipline

Calculate the amount of annual investment return rates, Using the table bel...

Using the table below, calculate the amount of overall increase of your purchasing power over the period of 5 years given the annual investment return rates and annual inflation ra

Match the item below by entering the appropriate code letter, Match the ite...

Match the items below by entering the appropriate code letter A. Controller B. Deficit C. Payout Ratio D. Stock Dividend E. Declaration Date F. Preemptive right G. Par Value H. L

Master budget, What are the four elements of the budgeting cycle?

What are the four elements of the budgeting cycle?

What are total fixed cost, Corporation has determined the contribution marg...

Corporation has determined the contribution margin ratio is 35% and the income tax rate is 40%. Required: A) Assume break-even volume in dollars is $1,500,000. What are total fixed

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd