3-1: Segregation of costs into fixed and variable components

The cost (for the year 2007) of Genesets ltd, manufacturer of state-of-art generators is given month wise as follows:

Volume Costs
Month (Units) (Rs in lakh)
April 300 3000
May 236 2750
June 361 3250
July 420 3500
August 533 4000
September 714 5000

Based on the above information, segegate the total cost of Genesets ltd. into the fixed and variable
components for the purpose of cost monitoring and control. You may use the different techniques for
the purpose of segregation.
This method involves comparing
the total costs for two different
level of output. The incremental
3-1: Solution cost due to the change in the
level of activity (volume)
denotes the variable component.
a. Comparision technique: Deducting the thus computed
Total Cost variable cost from the total cost
Variable cos t( per unit )= gives the fixed element of cost.
Volume
Taking two consecutive months for the computation purpose
for eg. If we want to estimate for the month of August and September
50004000
Variable cos t( per unit )= = 5.52
714533
Since Variable cost per unit is Rs. 5 the total cost and its division into variable and fixed components for the months
of August and September would appear as follows:

Volume Costs Variable cost Fixed cost

Month (Units) (Rs in lakh) (Rs in lakh) (Rs in lakh)
August 533.00 4000 2944.7513812 1055.248619
September 714.00 5000 3944.7513812 1055.248619

The difference between this

method and the previous method is
b. High and Low Points method (or Range method) that here difference between the
highest and the lowest total cost
Total Cost are taken in the numerator while
Variable cos t( per unit )= the highest and lowest volume in
Volume the denominator, unlike the cost
50002750 and volume difference of the two
Variable cos t( per unit )= = 4.70 consecutive period as done in the
previous method.
714236
Rest of the segregation process will remain the same as in
the previous method. Using the straight line
equation Y= a + bx
we can segregate the
total cost into the
variable and fixed
components as follows:
 Using the straight line
equation Y= a + bx
we can segregate the
total cost into the
c. Equation Method: variable and fixed
components as follows:
Where;
Y= Total costs
a = Fixed costs
b = Variable costs per unit
x = Number of units

Applying the equation to any two consecutive periods we get:

Y for August = 3000 = a + 400 b

Y for September = 3500 = a + 500 b
Solving the simultaneous equation we get the value of b as 5.
This value of b can be fitted into either of the two equations to get the value of a i.e. fixed costs
b (fixed costs)= Rs (in lacks). 1000

Note: Similarly there are other methods like least squares method, average method, average method etc. that can be used.
The resultant will be the same irrespective of the mtehod of segregation.
month wise as follows:

onents for the months

method etc. that can be used.
APPLICATION
To find out Break Even Point and Margin of Safety

You are required to: Input data in Yellow cells only

Fill in the following input data
a) Sales (Units)
b) Selling Price
c) Cost (fixed and variable)
d) Desired profit

THE OUTPUT: Output is in Red

Break Even Point and Margin of Safety

GO TO SHEET MARKED "Break-Even Point"

ty

cells only

t is in Red
Determining the Break Even Point and Margin of

Insert the Sales, Cost, and Profit related data in relevent yell

Year before
previous
year
Sales (Units) 7,500
Sales Price (per unit) 150.00
Variable cost (per unit) 79.75
Fixed Cost (in Rs.) 375,200
Desired Profit 1,500,000

P/V Ratio 0.47

Break-Even-Point (BEP), In Rs. 801,139
Break-Even-Point (BEP), In Units 5,341
Margin of Safety (in Rs.) 323,861
Margin of Safety (in Units) 2,159
Sales at Desired Profit (in Rs.) 4,003,986
Sales at Desired Profit (in Units) 26,693
nt and Margin of Safety

data in relevent yellow cells

Previous Current
year year
8,524 10,680
162.00 175.00
82.35 89.75
400,000 450,000
1,500,000 1,500,000

0.49 0.49
813,559 923,754
5,022 5,279
567,329 945,246
3,502 5,401
### ###
23,854 22,874