Lesson 1 MAS: Cost Concepts - Technical

Cost Function:
y = a + bx ;
where:
y = total costs
a = total fixed costs
b = variable cost per unit
x = activity level

Segregating Mixed Costs
1. High Low Method

2. Scatter Graph/Visual Fit Method

3. Least Squares Method/Simple Regression Analysis

 

 where:

y = total cost

a = total fixed cost

b = variable cost per activity level

x = activity level

N = number of observations

4. Multiple Regression Analysis = cost is caused by more than 1 activity measure

5. Other Approaches

     a. Industrial Engineering(Work Measurement Method) = relationship between input and output in physical forms

     b. Conference Method = based on opinions by various departments

     c. Account Analysis Method = based on experience and judgement

Correlation Analysis

r = extend of linear relationship between x and y

 1. No Correlation => r = 0

 2. Perfect Correlation => Positive Perfect (x increases, y increases) r = 1 ; 

                                          Negative Perfect (x increases, y decreases)  r = -1

 3. High Correlation => r > 0.5 ; r > -0.5

 4. Low Correlation => r < 0.5 ; r < -0.5