• The University of Sydney

• IBUS 3107

Chapter 14 Quantitative Analysis in Budgeting

1. Objectives

1.1 Analyse fixed and variable cost elements from total cost data using high/low

and regression methods.

1.2 Explain the use of forecasting techniques, including time series, simple

average growth models and estimates based on judgement and experience.

Predict a future value from provided time series analysis data using both

additive and proportional data.

1.3 Estimate the learning effect and apply the learning curve to a budgetary

problem, including calculations on steady states.

1.4 Discuss the reservations with the learning curve.

1.5 Explain the benefits and dangers inherent in using spreadsheets in budgeting.

2. Analysing Fixed and Variable Costs

209

Quantitative

Analysis in

Budgeting

Analysing Fixed

and Variable Costs

Time Series

Analysis

Learning

Curves

High-low

Method

Regression

Analysis

Four

Components

Additive

Model

Proportional

Model

Forecasting and

its problems

Three

Approaches

Practical

Application

Effects in

MA

Limitations

Using Spreadsheets

in Budgeting

Advantages

Disadvantages

2.1 Two important quantitative methods the management accountant can use to

analyse fixed and variable cost elements from total cost data are the high-low

and regression methods.

2.2 The high-low method

2.2.1 A method of analysing a semi-variable cost into its fixed and variable

elements based on an analysis of historical information about costs at different

activity levels.

2.2.2 The steps of high-low method

Step 1: Select the highest and lowest activity levels, and their costs.

(Note: do not take the highest and lowest cost).

Step 2: Find the variable cost per unit.

Cost at high level of activity – Cost at low level of activity

High level activity – Low level activity

Step 3: Find the fixed cost, using either the high or low activity level.

Fixed cost = Total cost at activity level – Total variable cost

2.2.3 The high-low method has the enormous advantage of simplicity. It is easy to

understand and easy to use.

2.2.4 The limitations of the high-low method are:

(a) The method ignores all cost information apart from at the highest and

lowest volumes of activity.

(b) Inaccurate cost estimates may be produced as a result of the

assumption of a constant relationship between costs and volume of

activity.

(c) Estimates are based on historical information and conditions may have

changed.

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