Cost Decision Management: Hi-Low, And Account Classification Methods
The analysis of cost behaviour is all about learning different trends and behaviour in an enterprise. To control the cost efficiently and effectively managers should understand the Cost behaviour properly. A corporation’s decision making, planning and controlling of operations is based upon the cost behaviour. Variable and fixed costs are two types of cost behaviour. All the changes in a business-like prices, costs and volumes of sales which affect the profit are analysed by CVP (Cost Volume Profit). Managers use Cost-Volume-Profit analysis to analyse the variable and fixed cost of a business according-to volume of products and products sold.
2. Benefits of Cost behaviour:
All the functioning cost of a corporation are converted …show more content…
Hi-low method is used to separate the mixed or variable cost from the fixed cost. Hi-low method works on the theory that change in volume in a period to period can cause change in total cost and it is assumed that the fixed cost can remain same. By using the two different proportions of activity, the variable cost can be determined from the fixed costs. The highest and lowest level of activity are taken and compared to the total costs to get mixed costs from fixed costs.
Account Classification Method is one of the methods used to determine cost analysis or cost behaviour. In Accounts Classification method, the past behaviour of the cost is analysed on a particular-type and then the cost is identified. With this method, a management accountant can differentiate between the cost which are changed during the change in level of production and the cost which are not affected after change in level of production. The cost expectation is truly based upon the cost behaviour and the level of production is a company.
3. Limitations of Hi-Low and Account Classification …show more content…
Variable costs and revenue of units are assumed as constant in Cost Volume Profit analysis which are acceptable in small aberrations specially from the current cycle of sales and production. Other thing assumed in CVP analysis is that the clean distribution among fixed and variable cost, however all the cost are variable costs in a long run. Due to the assumptions in collecting data CVP analysis lacks behind in giving precise and accurate results. The assumption about efficiency of products and production being constant can lead to invalid assumptions. The assumption of closing and opening inventories being same and units sold being equal to units produced makes CVP analysis very difficult and complex due to the changes in the level of inventory. Because of the approximations in the analysis a management accountant should decide how to use the data under this approach. Judgements must be made very carefully and not just on the