The following are cost estimation methods:

 a.

1. Engineering method
2. Account analysis method
3. Scatter Graph Method
4. High-Low method
5. Least-Squares method

1. Engineering method: The engineering method is based on the use of engineering analysis of technological relationships between inputs and outputs – for example methods study, work sampling and time motion studies. The approach is appropriate when there is a physical relationship between costs and the cost driver. This study is to make an analysis based on direct observations of the underlying physical quantities required for an activity and then convert the results into cost estimates.
2. Accounts analysis method: This method requires an inspection of each item of expenditure within the accounts for a particular period and then classify each item of expense as a wholly fixed, wholly variable or a semi-variable cost.
3. Scatter Graph method: This method involves plotting on a graph, the total costs for each activity level. The total cost is represented on the vertical (Y axis) and the activity levels are recorded on the horizontal (X axis). A straight line is fitted to the scatter of plotted points by visual approximation. 20

16 * * 12 * * * 8 * * * 4 * * * 0 * * 5 10 15 20 25 30 Example of a scatter graph

4. High-Low method: The high-low method consists of selecting the periods of highest and lowest activity levels; and comparing the changes in costs that result from the two levels. The fixed cost can be estimated at any level of activity (assuming a constant unit variable cost) by subtracting the variable cost portion from the total cost.

5. The Least-Squares method: This method determines mathematically, the regression line of best fit. It is based on the principle that the sum of the squares of the vertical deviations from the line that is established using the method is less than the sum of the squares of the vertical deviations from any other line that might be drawn.

b.

Units Cost Low level of production 2,700 1,050,000 High level of production 5,000 1,625,000 Difference 2,300 575,000 Variable cost 575,000/2300 = 250 Fixed cost 1,050,000 – (2700 x 250) = 375,000 Fixed cost with 20% increase 375,000 + (375,000 x 20%) = 450,000

July August September October November December Production (units) 4,800 3,200 6,000 6,600 8,200 5,800 Variable cost (N) 1,200,000 800,000 1,500,000 1,650,000 2,050,000 1,450,000 Fixed Cost (N) 375,000 375,000 450,000 450,000 450,000 450,000 Total Cost (N) 1,575,000 1,175,000 1,950,000 2,100,000 2,500,000 1,900,000