How to Estimate Costs Using the Scatter Graph Method

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  • 0:00 What Are Mixed Costs?
  • 0:46 Costs and Scatter Graphs
  • 1:28 How to Create a Scatter Graph
  • 2:46 Results of the Scatter Graph
  • 3:49 Lesson Summary
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Lesson Transcript
Instructor: Nova Emmons

Nova has taught accounting and business courses at a community college for 17 years. She has a master's degree in Workforce Education and Development, with specializations in Electronic Distance Education and Accounting.

A scatter graph is a graph that shows how a cost differs at various activity levels. From a scatter graph, you can develop a mixed cost equation that will enable you to estimate the amount of the cost for future periods.

What Are Mixed Costs?

Have you noticed that your electricity bill fluctuates with the different seasons? Have you also noticed that even when you use very little, or no electricity, you will still owe a flat fee just for having the electricity connected to your house? This type of cost is a mixed cost; it has two components that are added together to get the total. A utility bill is a common expense that is considered a mixed cost; each month you're charged a base amount that you will owe even if you don't use that utility, like electricity or water. The rest of the cost depends on how much of the service that you use; the more you use of the utility, the higher the bill. When you're calculating a budget, it can be difficult to estimate how much to allocate for this type of cost.

Costs and Scatter Graphs

One method of estimating mixed costs is by preparing a scatter graph. A scatter graph splits the cost into fixed and variable portions. Creating a scatter graph can help you determine the future amounts of a cost. The data from a completed scatter graph provides the information you need to create a cost equation for each of your mixed costs. The cost equation will provide you with fixed and variable estimates for each mixed cost. You will need historical data to create the scatter graph; one year's worth is the minimum to get a good approximation of the expense. For each month, you need the total of the cost and the total of the activity. The activity for utilities could be kilowatts used, gallons used, hours used, etc.

How to Create a Scatter Graph

Start a scatter graph by creating an x-axis with the activity data, and a y-axis with the total cost data. Plot each of the historical data points on the graph. Don't try to connect the points. Instead, look at the points as a whole, and try to mentally split them in half.

This graph is an example of a water bill. The y-axis is the monthly cost, the x-axis is the month. The plotted points are the amounts of gallons used in each month.

Plotted data of water bill

Then draw a line that divides the points, with half the points above the line, and half the points below the line. This line shows the relationship between the two variables on the graph and should be drawn so that it meets the y-axis. This is called a regression line.

Plotted data with regression line

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