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  • How To Estimate Fixed Costs: ( Excel)

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    John Anthony Ramirez Battad
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    This document discusses two methods for estimating fixed costs: high-low analysis and overhead allocation. High-low analysis uses the highest and lowest activity levels and their associated costs to determine a linear equation that can estimate costs at other activity levels. It connects the highest and lowest data points to determine the slope and y-intercept. Though simple, it is not statistically accurate since it only uses two data points. Overhead allocation involves determining whether costs are direct or indirect and how to allocate support department costs. There are three methods: direct, step, and reciprocal. The direct method ignores inter-support department services. The step method partially allocates these costs based on an allocation order. The reciprocal method fully recognizes inter-

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    Cost Accounting Lesson

    Original Title

    Cost Accounting

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    This document discusses two methods for estimating fixed costs: high-low analysis and overhead allocation. High-low analysis uses the highest and lowest activity levels and their associated costs to determine a linear equation that can estimate costs at other activity levels. It connects the highest and lowest data points to determine the slope and y-intercept. Though simple, it is not statistically accurate since it only uses two data points. Overhead allocation involves determining whether costs are direct or indirect and how to allocate support department costs. There are three methods: direct, step, and reciprocal. The direct method ignores inter-support department services. The step method partially allocates these costs based on an allocation order. The reciprocal method fully recognizes inter-

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    © All Rights Reserved
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    8 views2 pages

    How To Estimate Fixed Costs: ( Excel)

    Uploaded by

    John Anthony Ramirez Battad
    This document discusses two methods for estimating fixed costs: high-low analysis and overhead allocation. High-low analysis uses the highest and lowest activity levels and their associated costs to determine a linear equation that can estimate costs at other activity levels. It connects the highest and lowest data points to determine the slope and y-intercept. Though simple, it is not statistically accurate since it only uses two data points. Overhead allocation involves determining whether costs are direct or indirect and how to allocate support department costs. There are three methods: direct, step, and reciprocal. The direct method ignores inter-support department services. The step method partially allocates these costs based on an allocation order. The reciprocal method fully recognizes inter-

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    How to estimate Fixed Costs

    High-Low Analysis
    Similar to regression analysis, uses activity level to predict costs
    How costs behave at the highest and lowest activity level
    Connect the highest and lowest observed activity level
    (example)
    Cost(dependent variable, y-axis)
    Activity Level (independent
    variable, x-axis)
    100000
    10000
    175000
    15000
    300000
    20000
    350000
    25000

    Get the linear equation (y=ax+b)


    Slope: 16.67 (350-100/25-10): variable cost per unit (a)
    Y-intercept: use the high/low to substitute; =-66667
    Y=(16.67*30000)-66667 = 433400; the new estimated overhead
    Sometimes highest activity level has lowest cost and vice versa, use
    activity level pa rin, does not matter to us what the highest or lowest
    costs are
    There can be outliers, so exclude them from analysis
    Problem: not really statistically accurate because only 2 data points are
    used, companies use high-low analysis because it is easy to implement
    Does not matter how many data points you have because you only use
    2 so analysis is not improved
    Overhead can be direct if it is used directly wrt your department (exclusive)

    (example) Operating department


    HR supports Op Dept
    Maintenance is situational (pweds direct or not direct)
    IT support
    Janitorial services/housekeeping
    Support department allocation
    (example)
    Departments A and B are supported by Housekeeping (spent 35000)
    and Maintenance (20000 spent)
    HK provided 2100 hours to A; 700 hrs to B; 700 hrs to Maintenance
    Maintenance provided 1000 hrs to HK; B 1800; B 1200
    1. Direct Method ignores inter-support department services support

    Implication: ignore HK to MN and MN to HK; so all costs from MN


    and HK are put to A and B
    (*excel)
    2. Step Method sensitive which to allocate first
    -partially allocates inter-support costs
    -basis for allocation order depends on which support dept rendered
    more service to other support depts.
    -2 choices: based on % of service performed or cost of service
    performed

    (*excel)
    3. Reciprocal Method fully recognize inter support services
    - reciprocated costs
    (*excel)
    -theoretically most accurate

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