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What is the Scattergraph Method?

Scattergraph Method

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Scattergraph Method

The scattergraph method is a visual technique used primarily in cost accounting and managerial decision-making to help determine the behavior of costs, especially with respect to the relationship between total costs and activity levels. It helps in estimating the variable and fixed components of a mixed cost by plotting past historical data points and then fitting a straight line (often done manually) through the scattered points.

Here’s a step-by-step explanation of the scattergraph method:

  1. Data Collection: Gather historical data that includes the activity level (e.g., machine hours, production volume) and the associated total cost.
  2. Plot Data Points: Using a scatter plot, plot the activity levels on the x-axis and the associated total costs on the y-axis. Each data point represents a period (e.g., a month or a quarter).
  3. Draw a Line: Manually draw a straight line that best fits the data points. This line should capture the general trend of the data points.
  4. Interpret the Line: The point where the line intersects the y-axis represents the estimated fixed cost (because at 0 activity level, the cost remains fixed). The slope of the line represents the variable cost per unit of activity.
  5. Estimate Costs: Using the interpreted line, one can estimate costs for a given activity level. The formula based on the line is y=mx+cy=mx+c, where mm is the slope (variable cost per unit of activity) and cc is the y-intercept (fixed cost).

Advantages:

  • It’s a simple and straightforward method.
  • It provides a visual representation of cost behavior.
  • It can help in spotting outliers or irregularities in the data.

Disadvantages:

  • It’s subjective since drawing the “best fit” line depends on the individual’s judgment.
  • It may not be as accurate as other methods (like the high-low method or regression analysis) because it doesn’t necessarily use a mathematical approach to fit the line.
  • It’s more suitable for smaller datasets; with a lot of data points, the scatter can become too difficult to interpret.

Despite its limitations, the scattergraph method can be a useful preliminary tool for understanding cost behavior, especially when combined with other methods for more rigorous analysis.

Example of the Scattergraph Method

Let’s look at a practical example involving the scattergraph method.

Scenario:

Suppose a small manufacturing company wants to understand the relationship between the number of units produced and the total production cost, which includes both variable and fixed costs.

Data for the Past 6 Months:

MonthUnits ProducedTotal Production Cost ($)
Jan1001,200
Feb1501,650
Mar2002,100
Apr2502,550
May3003,000
Jun3503,450

Steps:

  1. Plot Data Points: Plot each month’s data on a scatter plot with Units Produced (x-axis) and Total Production Cost (y-axis).
  2. Draw a Line: By visually examining the data points, you can see they form an upward trend. Draw a straight line that seems to fit these points best. For simplicity, let’s assume the line goes through the points (100, 1,200) and (350, 3,450).
  3. Interpret the Line:
    • Fixed Cost: Observe where the line intersects the y-axis. Let’s say it touches the y-axis at $500. This suggests that when no units are produced, the production cost is $500, which would be the fixed cost.
    • Variable Cost: To find the slope (or variable cost per unit), pick any two points on the line. Using the two points we mentioned:
      • Change in cost = 3,450 – 1,200 = 2,250
      • Change in units = 350 – 100 = 250
      Variable cost per unit = 2,250 / 250 = $9 per unit

Conclusion:

From the scattergraph method, the company can estimate that for each unit produced, the production cost increases by $9 (variable cost). No matter the production level, there’s a consistent cost of $500 (fixed cost).

So, if the company plans to produce 400 units next month, the estimated production cost would be:

= (Variable cost per unit x Units) + Fixed cost
= ($9 x 400) + $500
= $3,600 + $500
= $4,100

Remember, while this method gives a reasonable estimate, it’s based on visual interpretation and past data. The actual costs can vary due to various factors not captured by this analysis.

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