Page 58 - BA2 Integrated Workbook STUDENT 2018
P. 58
Chapter 3
Predicting costs
6.1 Predicting future costs
We have now looked in detail at the three methods we can use to analyse semi
variable costs between the fixed and variable elements. Once the semi-variable cost
has been split between fixed and variable elements, this information can be used to
forecast the total cost for another activity level within the relevant range.
If we look back at out high-low example. We calculated that the variable cost was
$2.30 and the fixed cost was $15,000.
We can show this as: Total cost = 15,000 + (2.30 × number of units) and use this
to predict the total cost for other levels of activity.
If we want to predict the total cost for 13,000:
Total cost = 15,000 + (2.30 × 13,000) = $44.900.
6.2 Problems with using historical data to predict future costs
The main problem which arises in the determination of cost behaviour is that the
estimates are usually based on data collected in the past. Events in the past may not
be representative of the future and managers should be aware of this if they are
using the information for planning and decision making purposes.
Illustrations and further practice
Now try TYU 7 if time
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