5 2016-03-28 Febmat.com

# Methods used to split semi-variable costs into fixed and variable components

## Graphical method

## Regression and correlation analysis

## High-low method

Last updated: 28.03.2016

**Past data concerning production volume (x-axis) and their corresponding level of costs (y-axis) are plotted onto the chart. Cost function will be visible after linking these points. **

If the points are fragmented, the costs and volume of production are **not correlated**.

However, if we get a line or a shape, through which a line can be drawn, there is a **correlation**. If we extend the cost line, we can derive fixed costs from the point, where the costs line intersects y-axis.

**Regression and correlation analysis** is accurate and is suitable for nonlinear functions as well.

**High-low method** is a simplified graphical method, because it is not based on a series of data, but only on data of two periods - ideally those with the lowest and the highest volume of production. However, it should be a production volume achieved under normal circumstances.

*Calculation is simple*

*Unit variable costs*

(costs at highest production volume - costs at lowest production volume) / (volume at the highest production level - volume at the lowest production level)

*Fixed costs*

costs for the highest volume of production - (volume at the highest production level x unit variable costs)

*Scheme*

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Division of costs to various categories Direct (prime) costs Direct material costs Direct labor costs Classification of costs according to relationship with the level of production Production indirect costs (Production overheads) Indirect material costs (Material overheads) Indirect labor costs (Labor overheads) Indirect production expenses Conversion costs Classification of costs by function Sunk costs Avoidable costs Unavoidable costs Shut-down costs Cost object Cost unit Standard costing Process costing Common (pre-separation) costs in joint and by product costing Apportionment of common costs to joint products Treatment of joint (common) costs in case of by-products Costing by simple division Costing method by division using relative numbers Difference between joint and main/by products in common production