Account analysis method
Account analysis method estimates cost behaviour by classifying each general ledger account as fixed, variable or mixed based on management judgement and summing the classes; it is fast and practical but more subjective than regression.
FrameworkCost estimation
See it move
At 10,000 units a month, classifying every ledger account gives a total cost of €12,000: €4,800 from fixed accounts such as rent and the base charge on maintenance, and €7,200 from variable accounts such as materials and maintenance's usage element. Summing the classes produces a working cost formula quickly, without any regression.
The formula
Variables
- Total cost for the period at the given activity level (€)
- Total fixed costs (sum of all accounts classified as fixed by management judgement) (€)
- Variable cost per unit of activity (sum of variable accounts divided by normal activity level) (€ per unit)
- Activity level (cost driver volume) (units)
The cost function produced by classifying each general ledger account as fixed, variable or mixed based on operational judgement rather than statistical estimation.
Check yourself
A logistics manager uses the account analysis method to build a cost function for the distribution department. Which statement best describes the primary limitation of this method compared with regression analysis?