Hello thanks for your lectures. You say at the beginning of this lecture and in the notes that cannot be expected to be asked detailed questions on time series analysis and regression analysis and they used to be tested but now they are not so you dont go through them. But on the current syllabus for June 2022 it states to explain and apply regression and time series and know benefits and limitations. So should i assume this lecture hasnt been updated and go back to MA lectures as i have forgotten these.

There was a time many years ago that correlation and time series were not examined in Paper MA (was F2) and so were first examined in Paper PM (was F5). In those days they did often appear in the Paper PM exam.

They were then brought into the syllabus for Paper MA, and therefore were automatically examinable in Paper PM (because Paper PM can include anything from Paper MA, even though they were not explicitly listed separately in the Paper PM syllabus). Now they have been specifically listed just to make it clear, but as is written in the introduction section of Chapter 12 of our PM lecture notes, it remains unlikely that you will be asked detailed calculations, but if you have forgotten them you should watch the free Paper MA lectures on them.

The Paper PM lecture will not therefore be updated to include them again.

(I appreciate that you might have been exempt from Paper MA, in which case you should have been taught these areas in your degree course, but again there are full free lectures on them in Paper MA 馃檪 )

thank you as usual sir.. can we take a different approach when we calculate the variable and fixed cost example 100x+y=40000 400x+y=65000 where x is the variable cost and y is fixed cost

hello , i have a silly question, i know that we find the fix cos with the most and least units , but i dont understand the logic behind it, why cant we use any other two quantity?

If the relationship were exactly linear the you could take any two quantities. However in practice this is unlikely to be the case which is why regression analysis is a better approach.

In order to drive variable cost, is it just an assumption to take the difference of highest and lowest cost and units and then divide the remainder cost to remainder units? Why not any of the two items can randomly be picked up from the list and difference is calculated. What is logically wrong in it?

That would only work if the relationship was exactly linear, which is unlikely to be in practice. That is why correlation and regression is a better approach. The high-low method gives a quick approximation but has problems as explained in the lectures.

Hi, Could you please explain me why the variable cost of each month is not calculated as Total cost – Fixed cost ? Because we calculated the fixed cost before using the High- Low method, and the fixed cost should be the same for every month. I am asking because for July you are calculating the total cost as Fixed cost 32.500 + units * 75= 55.000, but the exercise mentions that July total cost is 50.000. This is why I am not understanding and I would like you explain me why. Thank you.

In a perfect world the fixed cost would be the same each month and the variable cost per unit would also be constant. However in the real world this is unlikely to be true and that is why the high low method is not very good (but is quick and easy). That is why regression analysis (which you should remember from Paper MA or whatever exempted you) is a much better approach. However regression analysis is not examinable in Paper PM.

I fail to understand why we take the ‘highest’ value and ‘lowest’ value (I know this is the correct way, I just fail to understand why). If we subtract a greater value from a lesser value shouldn’t that eliminate the fixed cost and enable us to find the variable cost per unit?

If the relationship was perfectly linear then it would not matter which two values you took. However, given it might not be perfectly linear we use the highest and lowest to give hopefully the best estimate (even though in fact that might not be the case).

Sir, i have a question that is bothering me a lot: you have said that the extra costs in those 2 months for the high low method, the extra costs are extra variable costs incurred because of producing the extra amount of units.

my question is what if we produce 600 units then? if we produce 600 units, then surely we must have fixed and variable costs, should we not? but here we are concluding that for producing 600 units, the total costs incurred are all variable, this is what is confusing me.

———

in hindsight, i believe the above understanding is wrong, its the extra amount of units produced when we compare 2 original productions, both of which must have had fixed costs, so that is why, since by producing extra units, the extra costs is the total variable costs ( fixed costs remain constant).

alishacarty says

Hello thanks for your lectures. You say at the beginning of this lecture and in the notes that cannot be expected to be asked detailed questions on time series analysis and regression analysis and they used to be tested but now they are not so you dont go through them. But on the current syllabus for June 2022 it states to explain and apply regression and time series and know benefits and limitations. So should i assume this lecture hasnt been updated and go back to MA lectures as i have forgotten these.

John Moffat says

There was a time many years ago that correlation and time series were not examined in Paper MA (was F2) and so were first examined in Paper PM (was F5). In those days they did often appear in the Paper PM exam.

They were then brought into the syllabus for Paper MA, and therefore were automatically examinable in Paper PM (because Paper PM can include anything from Paper MA, even though they were not explicitly listed separately in the Paper PM syllabus). Now they have been specifically listed just to make it clear, but as is written in the introduction section of Chapter 12 of our PM lecture notes, it remains unlikely that you will be asked detailed calculations, but if you have forgotten them you should watch the free Paper MA lectures on them.

The Paper PM lecture will not therefore be updated to include them again.

(I appreciate that you might have been exempt from Paper MA, in which case you should have been taught these areas in your degree course, but again there are full free lectures on them in Paper MA 馃檪 )

alishacarty says

great thank you John for clearing that up 馃檪

John Moffat says

You are welcome 馃檪

hermela says

thank you as usual sir..

can we take a different approach when we calculate the variable and fixed cost example

100x+y=40000

400x+y=65000

where x is the variable cost and y is fixed cost

hermela says

sir i get the answer and i understand my question .

GOD bless u

John Moffat says

You are welcome.

aniabagheri says

hello , i have a silly question, i know that we find the fix cos with the most and least units , but i dont understand the logic behind it, why cant we use any other two quantity?

John Moffat says

If the relationship were exactly linear the you could take any two quantities. However in practice this is unlikely to be the case which is why regression analysis is a better approach.

shakir7385 says

Dear John,

In order to drive variable cost, is it just an assumption to take the difference of highest and lowest cost and units and then divide the remainder cost to remainder units? Why not any of the two items can randomly be picked up from the list and difference is calculated. What is logically wrong in it?

John Moffat says

That would only work if the relationship was exactly linear, which is unlikely to be in practice. That is why correlation and regression is a better approach. The high-low method gives a quick approximation but has problems as explained in the lectures.

mbruno says

Hi,

Could you please explain me why the variable cost of each month is not calculated as Total cost – Fixed cost ? Because we calculated the fixed cost before using the High- Low method, and the fixed cost should be the same for every month.

I am asking because for July you are calculating the total cost as Fixed cost 32.500 + units * 75= 55.000, but the exercise mentions that July total cost is 50.000. This is why I am not understanding and I would like you explain me why.

Thank you.

John Moffat says

In a perfect world the fixed cost would be the same each month and the variable cost per unit would also be constant. However in the real world this is unlikely to be true and that is why the high low method is not very good (but is quick and easy).

That is why regression analysis (which you should remember from Paper MA or whatever exempted you) is a much better approach. However regression analysis is not examinable in Paper PM.

mbruno says

Thank you very much

John Moffat says

You are welcome 馃檪

visheshparyani says

Hey John,

I fail to understand why we take the ‘highest’ value and ‘lowest’ value (I know this is the correct way, I just fail to understand why). If we subtract a greater value from a lesser value shouldn’t that eliminate the fixed cost and enable us to find the variable cost per unit?

Thank you,

Vishesh Paryani

John Moffat says

Yes, and that is what we do 馃檪

visheshparyani says

My question is why do we have to take the highest and lowest value and not just a higher and lower value? Why does it have to be at the extremes?

John Moffat says

If the relationship was perfectly linear then it would not matter which two values you took. However, given it might not be perfectly linear we use the highest and lowest to give hopefully the best estimate (even though in fact that might not be the case).

visheshparyani says

Oh, I understand.

Thank you for the fast reply John, really appreciate it 馃檪

perkeqimarjeta says

Sir, are these lessons still relevant for the exam of paper F5 in March 2020?

Thank you!

John Moffat says

Of course 馃檪

Our lectures are always kept up-to-date for the current syllabuses.

perkeqimarjeta says

Many thanks 馃檪

John Moffat says

You are welcome 馃檪

alie2018 says

Thanks John. This approach is simple and straightforward

jareerabedin says

Sir, i have a question that is bothering me a lot:

you have said that the extra costs in those 2 months for the high low method, the extra costs are extra variable costs incurred because of producing the extra amount of units.

my question is

what if we produce 600 units then?

if we produce 600 units, then surely we must have fixed and variable costs, should we not?

but here we are concluding that for producing 600 units, the total costs incurred are all variable, this is what is confusing me.

———

in hindsight, i believe the above understanding is wrong, its the extra amount of units produced when we compare 2 original productions, both of which must have had fixed costs, so that is why, since by producing extra units, the extra costs is the total variable costs ( fixed costs remain constant).

John Moffat says

Yes – what you have written is correct. The fixed costs stay the same and so there is just the extra variable cost.