Premium Essay

Advanced Management Accounting

In: Business and Management

Submitted By Marscp2014
Words 1150
Pages 5
14/05/2014

Mixed Costs
Total Mixed Cost VC Per Unit (Slope)

Purpose of Mixed Cost Analysis
To predict cost at an activity level with no historical record:

Total mixed cost line can be expressed as:

2N

Y
Total Utility Cost

Fixed Cost (Intercept)

Level of Activity

If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, can you predict the utility of next month when you plan to use 2,000 kilowatt hours?

Y = a + bX
Variable Cost per KW Fixed Monthly Utility Charge

Y = $40 + ($0.03 × 2,000) Y = $100

X Activity (Kilowatt Hours)

A mixed cost has both fixed and variable components. Total cost CHANGES with activity level but NOT IN PROPORTION

The High-Low Method
1. Find the data with highest & lowest activity level
2. Compare high vs low point data to get the slope, b, unit VC 3. Use either high or low point data to get a, total fixed cost
Assume the following hours of maintenance work and the total maintenance costs for six months.

Y = a + bX

• From Algebra, if we know any two points on a line, we can determine its slope.

2. Break-Even Analysis (J. Smith ~ Taxi Driver)
Break Even Point is the point at which costs and sales are equal CM = fixed costs.
Fixed costs (FC) Insurance Car payment Interest Dispatcher fees Variable costs (VC) Gas Maintenance & repairs

neither gain nor loss

$

(principal or amortization)

Value of Costs or Revenue

Step 2, the slope or b is determined by difference in cost (y) difference in hours (x).
(MC2 – MC1)/(units 2 – units 1) = [(FC+VC 2)-(FC+VC 1)]/(units 2 –units 1)
= (unit VC * units 2 – unit VC * units 1)/(units 2 – units 1)

profit = CM – Fixed costs Fixed costs = CM at break-even point Fixed costs = unit CM * units sold at break-even Fixed costs = unit CM * break-even units BEP units = FC/unit CM BEP sales = BEP units * unit price...

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