3.2.1 Scatter graph method

THE SCATTER GRAPH METHOD

For this method a scatter diagram is constructed which is used to visually i.e. by inspection deduce a relationship from observed pattern if there is any. By obtaining any two points on constructed graph, we can fit a straight line if the pattern suggests a linear relationship.

Non-linear relationship Quadratic since has one turning point

 

No relationship between x and y

Linear but inverse relationship

x

 

Illustration

Cost and activity data are plotted in a similar manner to that above and a line drawn at an angle which is judged to be the best representation of the slope of the plotting.

Units of output

 

Scatter graph showing visual line of best fit.

 

The dotted line is drawn to show the intersection with the vertical axis and thus gives an estimate of the fixed content of the cost being considered, in this case 6400. The slope of the line, i.e. the variable element, is found as follows:

 

Cost @ zero activity                           = sh.400

Cost @ 100 units activity  = sh.1,250

^,                                 = sh. 8.5

 

Therefore the estimate cost function = sh. 400 + 8.5x where x = units of output, i.e. the independent variable.

The graphical method is simple to use and provides a visual indication of approximate cost behavior. Because each individual is likely to draw a different line with a different slope the method is subjective and approximate. A more objective and accurate approach is to calculate the line of best fit mathematically using the least squares method.

 

Advantages of visual fit method

1. It takes into account all the observations unlike the high low method.
2. It is easy to apply.

 

Disadvantages of visual –fit method

1. It cannot be used for two or more independent variables
2. We cannot measure the size of probable error.

It is subjective to some extent.