Estimation Techniques And The Linnear Equation

Question 1

What is a semi variable cost?

Answer 1

Combination of variable and fixed costs

Question 2

Three most common methods to divide variable and fixed costs

Answer 2

High - low method
Scatter diagram
Simple regression (least squares method)

Question 3

What is the linear equation and its variable meanings?

Answer 3

Y = a + bx 
Y is the total costs (dependent variable)
A is the total fixed costs
B is the variable cost per unit 
X is the total activity or production

Question 4

How does the high - low method work?

Answer 4

1. Take the highest and lowest ACTIVITY levels for your data set
2. (Highest cost - lower cost) / (higher activity - lower activity)
   = variable cost PER UNIT

Question 5

How do you get the fixed cost using the high - low method?

Answer 5

1. Choose one of the two data sets previously used

2. Total fixed cost = total cost - (total activity x variable cost per unit)

Question 6

How do you draw a scatter diagram?

Answer 6

Plot a point of total cost (Y) for each activity level (X)

Draw a diagonal (as best you can) that is the same distance between data points

Question 7

How would you find a budgeted semi-variable cost using a scatter diagram?

Answer 7

By using a diagram with past activity and corresponding costs;
Select a volume (X axis), draw a line up then left across to the y X is.
The fixed costs are already shown from the y intercept
The variable cost can be worked out by taking two points on the X axis and their corresponding y axis value and then the high low method

Question 8

How do you use simple regression?

Answer 8

By simultaneously solving the two formula;
sumXY = A(sumX) + BsumXsquared (note: just the X is squared)
and
sumY = an + BsumX

Question 9

What does the ‘A’ in the simple regressions formula mean?

Answer 9

It is the number of data point used

Question 10

What are these estimation techniques used for?

Answer 10

They are used to forecast and predict the behavior of fixed and variable costs