Cost Concept and Segregation
Cost is the amount of resources given up in exchange for some goods or
services. Cost means the total of all expenses incurred for product or services.
Fixed cost : A cost that doesn’t change in a short term, irrespective of how the
volume of production or the sales may change is the fixed cost. These type of
costs are crucial and can’t be avoided although production level is nil. Salary, rent,
administrative expenses etc. are some examples of fixed cost.
Variable cost : These are the costs that change when the output changes. Variable
cost changes exactly the same proportion as the output changes. Cost which
changes in the same proportion as the units produced or sold, is the variable cost.
Some examples of variable cost are direct material, direct wages, direct expenses
etc.
Semi – variable cost : Semi – variable cost has elements of both fixed cost as well
as variable cost. This type of cost remains fixed up to a certain level of production
and changes with the change in the volume of production beyond this level. We
can see the fixed part as a base level cost that always incurred while as the variable
proportion of the cost is an additional cost which changes as we changes the
volume of production. Electricity charge, Telephone charge, Water and supply etc.
are some examples of this type of cost.
Segregation of Semi – variable cost :
(1) Under High – Low method :
- Variable cost per unit (b) = High cost - Low cost
High unit - Low unit
Or, Variable cost per unit (b) =
Difference in cost
Difference in unit
- For fixed cost (a),
Y = a + bx
A = Y - bx
Where,
Y = Total cost
a = Fixed cost
b = Variable cost per unit
x = Production unit
(2) Under Least Square Method :
Segregation of cost by using Least Square Method
Production units
Indirect expenses
(X)
(Y)
XY
∑X =
- Variable cost per unit (b) =
∑Y =
∑ XY =
N∑ XY - ∑X . ∑Y
N ∑ X2 - (∑X)2
- Fixed cost (a) = ∑Y - b . ∑X
N
X2
∑ X2 =
Cost Concept and Segregation of Cost
(1) The following information are provided to you :
Output Units
Supervision Cost
500 units
Rs. 2,000
4,000 units
Rs. 9,000
Required : (a) Segregation of cost by using High – Low method
(b) Total supervision cost for 5,000 units
(2) The total cost for 200 units is Rs. 1,600 and for 500 units is Rs. 2,500.
Calculate total cost for 800 units of production.
(3) The difference of total cost between 3,000 units and 6,000 units of output level
is Rs. 15,000. If total cost for 3,000 units is Rs. 19,000, segregate variable cost per
unit and fixed cost for the period by using High – Low method.
(4) Find out production level that costs Rs. 25,000 if variable cost per unit is Rs. 5
and fixed cost is Rs. 10,000.
(5) The production unit and indirect labour cost of a manufacturing company for
last month are given below,
Production unit
Indirect wages
1,000 units
Rs. 20,000
2,000 units
Rs. 30,000
3,000 units
Rs. 40,000
4,000 units
Rs. 50,000
5,000 units
Rs. 60,000
Required : (a) Segregation of cost by using Least Square method.
(b) Total indirect wages for 8,000 units of production.
(c) Production level for total indirect wages of Rs. 1,60,000
(6) Variable cost per unit = Rs. 10
Total cost for 5,000 units = Rs. 80,000
Required : Total cost for 7,000 units