What are examples of variable costs, and what strategies do financial leaders use to forecast them?

Variable costs are costs that fluctuates with respect to the level of activity. Examples include direct material cost, direct labour cost, direct expenses and variable overheads.

Financial leaders use high and low method, least square regression method, scatter graph method and accounts analysis method to forecast variable costs.

Explanation:

Variable costs are costs that rise with the level of activity.

High and low method is used to forecast these costs, High and low method considers the difference between highest cost and highest activity level and the difference between lowest cost and lowest activity level. The variable cost is obtained by dividing difference in cost by the difference in activity level.

Least square regression method uses a scientific approach to separate cost by representing the cost by Y (dependent variable) and representing the activity level by X (independent variable). The variable cost is obtained by applying the least square regression formula.

Scatter graph method is a graphical method of separating costs. In this case, cost is plotted on the vertical axis while the activity level is plotted on the horizontal axis. The variable cost is obtained by determining the slope of the graph.

Account analysis method involves the determination of variable cost and fixed cost based on the judgement of the accountant or fiance expert.