COST

BEHAVIOR
Prepared by:
GROUP 1- 3FME
 Intended Learning Outcomes

1. Describe the nature and behavior of fixed and

variable costs.
2. Use regression analysis and high/low method to
define and analyze mixed costs.
3. Identify the difference between variable costing and
absorption costing.
4. Recognize the benefits of using variable costing for
decision making.
 High Low Method vs.
Regression Analysis

The high low method and regression

analysis are the two main cost estimation
methods used to estimate the amounts
of fixed and variable costs. Usually,
managers must break mixed costs into
their fixed and variable components to
predict and plan for the future.
High Low Method Formula

Where:
• Y2 is the cost at the highest activity level
• Y1 is the cost at the lowest activity level
• X2 is the number of units at the highest activity
level
• X1 is the number of units at the lowest activity level
 Once the variable cost has been calculated, the fixed
cost can be derived by subtracting the total variable cost
from the total cost. This is represented by the following
formula:
 
• Fixed Cost = Y2 – bX2
or
• Fixed Cost = Y1 – bX1

Where:
• b is the variable cost
Example:
Company ABC is a manufacturer of
pharmaceuticals. The company wants to estimate the
amount of overhead costs that it will incur in April,
given that the company plans to make 8,000 units in
that month. Following are the figures from January to
March:

Using the variable cost formula, where:

Y2 = $30,000 Y1 = $25,000
X2 = 6,000 X1 = 4,000
• Fixed Cost = $30,000 – (2.5 x $6,000) = $15,000
or
• Fixed Cost = $25,000 – (2.5 x $4,000) = $15,000

Projected variable cost for the month of April is calculated as

follows:
= 2.5 x $8,000
= $20,000
Total cost = Fixed cost + Variable cost
= $15,000 + $20,000
= $35,000
 The Benefits of using Variable Costing
for Decision Making

Variable costing is used for taking managerial

decisions such as which product to discontinue,
determining product-mix, make or buy decisions,
and how to price a product. In addition, variable
costing is used for finding a margin of safety,
optimal capacity utilization rate, and the degree of
operating leverage.
 Variable costing is used for calculating
the break-even point based on the cost-
volume-profit analysis. The break-even
point is the level where there are no
profits/losses. Variable costing helps in
determining the contribution margin of a
product.
 Variable Costing’s
Advantages

1. Planning and Control

2. Managerial Decision-making
3. Product Pricing Decisions
4. Cost Control
5. Inventory Changes do not affect profit
6. Avoiding the impact of fixed costs
7. Performance Evaluation of Managers
8. Segmental Reporting
9. Customer Profitability Analysis