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

What are the variable expenses per unit, Superior Door Company sells pre-hu...

Superior Door Company sells pre-hung doors to home builders. The doors are sold for $60 each. Variable costs are $42 per door and fixed costs total $450,000 per year. The company i

Difference between balance sheet and income statement, (i) Describe the di...

(i) Describe the difference between the balance sheet and the income statement in financial statements of companies. (ii) Give two examples of intangible assets and two exampl

Advantages of standard costing, Advantages of Standard Costing 1. Man...

Advantages of Standard Costing 1. Management via Exception: the standard costing is an example for management via exception. By studying the variances, management's attentio

Mining industry, are exploration costs of a mining company an asset or an e...

are exploration costs of a mining company an asset or an expense

How much will alan save or lose, Hale Company makes sets of wrenches. They ...

Hale Company makes sets of wrenches. They are trying to decide whether to continue to make the case the wrenches are sold in, or to outsource it to another company. The direct mate

introduction of internal rate of return , Introduction of Internal Rate of...

Introduction of Internal Rate of Return The traditional internal rate of return (IRR) method of project selection has been shown to be inferior to the NPV method due to vario

Measuring performance in organization, list and discus the problem encounte...

list and discus the problem encountered in adopting profit as a yardstick in measuring performance

Compute the net cash used, Martinez Corporation engaged in the following ca...

Martinez Corporation engaged in the following cash transactions during 2012. Sale of land and building $186,710 Purchase of treasury stock 42,130 Purchase of land 39,130

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