The most appropriate method for segregating semi-variable cost is least square method.
Y = + bx (cost is the sum of fixed element ‘a’ and variable element ‘bx’ of which x = number of units produced)
‘a’ and ‘b’ can be determined by solving two simultaneous equations:
∑y = a + b∑x
∑xy = a∑x + b∑x2
Generally, it is stated that fixed cost remains fixed irrespective of change in the level of activity. However, fixed cost also changes if the activity level changes. As the level of activity increases more supervisory staff becomes necessary. It becomes necessary to increase the capacity of stores, repairs and maintenance, personnel department, selling outlets etc. all this increases fixed costs.
Thus fixed cost remains fixed within a range of capacity.
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