Scattergraph Method
What Is the Scattergraph Method?
The scattergraph (or dissipate graph) method is a visual technique utilized in accounting for isolating the fixed and variable components of a semi-variable expense (likewise called a mixed cost) to estimate and budget for future costs. A semi-variable expense is more confounded to examine since it is comprised of both fixed and variable factors.
A scattergraph utilizes a horizontal x-pivot that addresses a firm's production activity and a vertical y-hub that addresses its cost. Data are plotted as points on the graph, and a regression line that runs through the specks addresses the best fit of the relationship between the variables.
Grasping the Scattergraph Method
Business managers utilize the scattergraph method while assessing costs to expect to work costs at various activity levels. This is known as a mixed or semi-variable cost. Otherwise called a semi-fixed cost, this alludes to a cost made out of a combination of both fixed and variable parts. Costs are fixed for a set level of production or consumption, and become variable after this production level is surpassed. In the event that no production happens, a fixed cost is much of the time actually incurred.
The method gets its name from the overall picture of the graph, which comprises of many dissipated spots. The method is simple, however it is likewise uncertain. Preferably, the consequence of a scattergraph analysis is a formula with the total amount of fixed cost and the variable cost per unit of activity.
Model
Assuming that an analyst works out that the fixed cost associated with a mixed cost is $1,000 each month and the variable cost part is $3.00 per unit, then, at that point, it very well may be resolved that an activity level of 500 units in a accounting period will compare to a total mixed cost of $2,500 (calculated as $1,000 fixed cost + ($3.00/unit x 500 units)).
Special Considerations
The scattergraph method is definitely not an excessively exact approach for deciding cost levels since it does exclude the impact of step costing points, where costs change decisively at certain activity levels. The method is likewise not valuable when there is little correlation between the costs incurred and the connected activity level in light of the fact that extending costs into what's to come is troublesome. Genuine costs incurred in later periods could differ from the scattergraph method's projections.
Alternate methods of cost assessment incorporate cost accounting's high-low method, a technique of endeavoring to separate out fixed and variable costs given a limited amount of data; account analysis, in cost accounting, a way for an accountant to examine and measure the cost behavior of a firm; and least squares, a statistical method used to decide a line of best fit by limiting the sum of squares made by a mathematical function.
Highlights
- The method gives a mixed cost equation that allows managers and accountants to estimate the amount of the cost for future periods under different conditions.
- The graph uses a linear regression to create a line of best fit to plot the relationship between a firm's productivity and expenses.
- The scattergraph method visually demonstrates how a semi-variable expense contrasts for different activity levels of a firm.
