For instance, one point will represent 21,000 hours and $84,000 in costs. The next point on the graph will represent 23,000 hours and $90,000 in costs, and so forth, until all of the pairs of data have been plotted. Finally, a trend line is added to the chart in order to assist managers in seeing if there is a positive, negative, or zero relationship between the activity level and cost. Learn how to effectively use the scattergraph method for cost accounting to identify and analyze fixed and variable costs.
3: Cost Estimation Methods
In cost accounting, the Scatter Graph is used to separate the fixed and variable costs from the mixed cost. We use this method to calculate the total c corporation taxes cost at different activity levels. Then draw the line alongside the visual spot, the line will use to estimate the fixed and variable cost.
Step 1: Draw scatter graph
Figure 5.5 shows a scattergraph for Bikes Unlimited using the data points for 12 months, July through June. The method is also not useful when there is little correlation between the costs incurred and the related activity level because projecting costs into the future is difficult. Actual costs incurred in future periods might vary from the scattergraph method’s projections. In scatter graphs, cost is considered the dependent variable because cost depends upon the level of activity. The activity is considered the independent variable since it is the cause of the variation in costs. Regent’s scatter graph shows a positive relationship between flight hours and maintenance costs because, as flight hours increase, maintenance costs also increase.
Regression Analysis
In reviewing Figure 5.4, you will notice that this approach only considers the high and low activity levels in establishing an estimate of fixed and variable costs. The high and low data points may not represent the data set as a whole, and using these points can result in distorted estimates. When using this approach, Eagle Electronics must be certain that it is only predicting costs for its relevant range.
Review Problem 5.6
- One of the tools used in this domain is the scattergraph method, which helps in analyzing cost behavior by plotting data points on a graph.
- In March, Waymaker produced 1,000 units and used 2,000 hours of production labor.
- As the names indicate, a 2D scatter plot has coordinates on a two-dimensional graph with an x- and y-axis (like you see on a piece of paper).
For example, you want to show a connection between consuming sugar and weight. You could plot this on a scatter plot, with one axis representing the amount of sugar each person consumed during a specific time period. The other axis may represent the pounds gained or lost during that time.
Review Questions
A scatter plot is a type of graph used to show the relationship between two variables. All the data must be put into the graph, each point represents the number of units produces and the total cost spend. The two types of scatter plots are two-dimensional (2D) and three-dimensional (3D).
In this case, it would be February and May, as shown in Figure 2.33. We always choose the highest and lowest activity and the costs that correspond with those levels of activity, even if they are not the highest and lowest costs. Creating a scattergraph begins with the collection of relevant data. This typically involves gathering historical cost information and corresponding activity levels over a specific period.
Anyone working with numbers has likely worked with a scatter plot at some point in their career. Environmentalists and meteorologists also may use scatter plots to indicate variables like temperature or precipitation. Understanding the various labels used for costs is the first step toward using costs to evaluate business decisions.
One of the assumptions that managers must make in order to use the cost equation is that the relationship between activity and costs is linear. A diagnostic tool that is used to verify this assumption is a scatter graph. Once the data points are plotted as described in step 1, draw a line through the points touching one data point and extending to the y-axis.
To determine the variable cost per unit, all costs identified as variable are totaled and divided by the measure of activity (units produced is the measure of activity for Bikes Unlimited). One of the fundamental concepts behind the scattergraph method is the distinction between fixed and variable costs. Fixed costs remain constant regardless of activity levels, while variable costs fluctuate in direct proportion to changes in activity.
Using this information and the cost equation, predict Waymaker’s total costs for the levels of production in Table 2.12. It is evident from this information that this company has very little in fixed costs and relatively high variable costs. This is indicative of a company that uses a high level of labor and materials (both variable costs) and a low level of machinery (typically a fixed cost through depreciation or lease costs).