Mixed Costs
Practice As You Learn
Practice Problem 1
Use a “Scattergraph” to determine the fixed and variable cost portions of a mixed cost:
Your company cell phone plan consists of 10 phones and you are charged so
much per month plus so much per every minute over 5000 total minutes. The
contract the company signed has been lost and you are being asked to determine
the estimated fixed cost and variable costs for the total cell phone cost.
After looking at the past 6 month cell phone bills, you have determined:
Total Cost Total Minutes Used
$825 13,124
$783 12,080
$678 9,458
$743 11,065
$861 14,024
$718 10,438
Answer
Use a “Scattergraph” to determine the fixed and variable cost portions of a mixed cost:
To get you started:
1st - Draw a line up and down on the left side of your paper and write the
$ in increments of $100, starting with $0 at the bottom.
2nd – Draw a line across the bottom of the vertical line and write the activity
of minutes used in increments of 1,000 starting with 0.
3rd. – Make a dot for each of the above cost and minutes (activity) used
4th – Draw a line through two of the dots that are in the middle of all the
points that intercepts with the up and down line.
The point where the line crosses the up and down axis is the
estimated fixed cost portion of the total cost.
You should be somewhat close to $300 when it intercepts the axis.
5th -- Now that you know the fixed cost portion, use the formula to find the
variable cost per activity. Pick one of the points that you drew the line
through and calculate the following.
I used $743 total for 11,065 minutes.
Total Cost $ – Fixed Cost $ = Total Variable Cost $
$743 - $300 = $443 total variable cost
Total Variable Cost $ / Total Activity = Variable Cost $ per Activity
$443 / 11,065 = $0.04 rounded variable cost per activity (minute)
You can now write the cost formula that will estimate total cost at any
level of activity:
Total Cost = Total Fixed Cost + (variable cost $ per activity x # activity)
$300 + ($0.04 x # minutes used)
This is only an estimate and will not work out exactly for all points plotted.
Practice Problem 2
Use the “High Low Method” to determine the fixed and variable cost portions of a mixed cost:
Your company cell phone plan consists of 10 phones and you are charged
so much per month plus so much per every minute over 5000 total minutes.
The contract the company signed has been lost and you are being asked to
determine the estimated fixed cost and variable costs for the total cell phone cost.
After looking at the past 6 month cell phone bills, you have determined:
Total Cost Total Minutes Used
$825 13,124
$783 12,080
$678 9,458
$743 11,065
$861 14,024
$718 10,438
Use the following formulas to calculate the total fixed cost portion and
the variable cost per unit portion of total cost.
Variable Cost = Cost at high activity level – Cost at the low activity level
High activity level – Low activity level
Fixed Cost $ = Total Cost $ – (variable cost $ per X # of activity)
Total Cost = $ Fixed Cost + (Variable cost $ per activity X activity used)
Answer
Use the “High Low Method” to determine the fixed and variable cost portions of a mixed cost:
Use the following formulas to calculate the total fixed cost portion and
the variable cost per unit portion of total cost.
1st -- Select the high activity and the low activity and put the numbers into
following formula.
Variable Cost = Cost at high activity level – Cost at the low activity level
High activity level – Low activity level
$861 - $678 = $183 = $.04
14,024 – 9,458 4,566
2nd – Take the dollar amount that is for the same period as the high and put it
in the high cost and the dollar amount that is the same period as the
low activity and put it in the low cost
Do not just use the highest and the lowest cost.
3rd – Now that you have calculated the variable cost per unit as $0.04 per minute,
use the formula below to determine the fixed portion of the cost.
You must select either the high activity and total dollars associated with the high
activity or the low activity and total dollars associated with the low activity.
Either one will give the same answer for the fixed cost portion.
I am going to use the high $ and the high activity
Fixed Cost $ = Total Cost $ – ($ variable cost X # of activity )
$ ? = $861 – ($0.04 x 14,024 = $561)
Fixed costs = $300
4th – You can now write the total cost formula as:
Total cell phone costs = $300 + ($0.04 x minutes used)
This method is used to estimate the fixed cost portion and the variable cost
portion of a mixed cost and is not exact for each period that incurs costs.