A scatter graph technique is the method of separating semi-variable costs into fixed and variable elements. This method is also known as the regression line method. This method is based on past data, but it takes into account all data as compared to the high low method which considers only the highest and lowest items in the given data. This article provides five steps you should follow when segregating or separating semi-variable cost by using a scatter graph technique
The following are steps which are involved in separating semi-variable cost using the scatter graph technique:
- Use the x-axis to represent the output sales (level of activity)
- Use the y-axis to represent the costs
- Plot the point using the given data
- Draw a line through the point plotted, with the same number of points on each side of the line. In the process of drawing the line ignore any abnormal cost if there is any. The line so drawn is known as the line of best fit.
- Extend the line so drawn above the y-axis. The point where the line of best fit intersects with the y-axis is taken to be the amount of fixed cost.
One main limitation of the scatter graph technique is that there will be a change in the fixed cost even if there is a slight bias in drawing the straight line.