Wednesday, October 7, 2015
How to use regression and scatter plot method to figure out fix and variable cost
Scatter graph method refers to a graphical process for segregating fixed and variable components concerning mixed cost through plotting activity level near x-axis and equivalent total cost (mixed cost) near y-axis.
A regression line is then sketched on the graph with visual inspection to compute the total fixed cost and variable cost for each unit. The meeting point of line in y-axis denotes the calculated fixed cost and the slope of the line denotes the average variable cost for each unit.
This method should be used cautiously as the visual inspection does not include any mathematical testing.