3.1.1 Accounts Analysis method
ACCOUNT ANALYSIS
Under account analysis method, the accountant examines and classifies each ledger account as variable, fixed or mixed. Mixed accounts are broken down into their variable and fixed components. They base these classifications on experience, inspection of cost behavior for several past periods or intuitive feelings of the manager.
This is with a view to develop a cost function in the form = +
Illustration
Suppose a company ABC has the following costs with a value of 7000 units.
| Amount | Variable | Fixed | |
| Direct labour
Materials Repairs and maintenance Depreciation Administration overheads Indirect labour
|
150,000
125,000 5,000 15,000 1,000 4,000 300,000 |
150,000
125,000 5,000 – – – 280,000 |
–
– – 15,000 1,000 4,000 20,000 |
Required;-
Determine the cost equation using account classification method and determine the cost of producing 1,400 units
Solution
Variable cost b = ,
a = shs 20,000
Substituting in the Equation y= a +bx
Y= 20,000 + 40x
Hence the cost of producing 1400 units is
Y= 20,000 + 40(1,400) Shs. 76,000
Illustration
In the year 2012 VIP incurred the following expenses to maintain 1500 lecturers.
| Sh | |
| Administration expenses (40% variable)
Lecturing pay (60% variable) Airtime allowance (fixed) Sundry expenses (50% fixed) Soda allowance (variable) |
4,000,000
8,000,000 1,000,000 500,000 300,000 |
Required;-
- Using accounts analysis method, express an equation in form y = a + bx
- Using the equation expressed above, estimate the total cost of 2000 lecturers incurred to be employed in 2013.
Solution
| Total cost | Variable | Fixed | |
| Administration expenses
Lecturing pay Airtime allowance Sundry expenses Soda allowance |
4,000,000
8,000,000 1,000,000 500,000 300,000 |
1,600,000
4,800,000 – 250,000 300,000 6,950,000 |
2,400,000
3,200,000 1,000,000 250,000 ______ 6,850,000 |
b = = 4633.33 a = 6,850,000
- y = a + bx ∴ y = 6,850 + 4633.33x
- For 2000 lecturers
Total cost y = 6,850,000 + 4,633.33 ×2,000 = Shs. 16,116,660