# How do you apply the account analysis?

Definition

Account analysis consists in classifying cost accounts in the ledger as variable, fixed, or mixed with respect to a cost driver. When costs in an account are mixed, analysts make an estimate about the percentage of these costs which is variable and the percentage which is fixed. The unit variable cost is then obtained by dividing the amount of costs identified as variable by the volume of cost driver. A natural extension of the account analysis consists in specifying for each account of the ledger the percentage of cost driven by each underlying cost driver.

$V_{c}^d = \frac{ \sum_{a=1}^{f} TC_{p}^a \times PV_a^d}{Q_p^d} \\ \quad \\ FC_p = \sum_{a=1}^{f} TC_{p}^d \times (1-PV_a)$

where $$V_c^d$$ is the unit variable cost associated with the cost driver $$d$$, $$TC_{p}^a$$ is the total cost in account $$a$$ in period $$p$$, $$PV_a^d$$ is the estimated percentage of costs in account $$a$$ which is proportional to the cost driver $$d$$, $$Q_p^d$$ is the volume of cost driver $$d$$ in period $$p$$, and $$FC_p$$ is the total fixed costs in period $$p$$.

Illustration

Advantages

Account analysis shares some advantages with the engineering approach. First, it is not too demanding in terms of data as it requires only one period. Second, it can also model costs with multiple cost drivers. A specific advantage of account analysis is that it is not too time consuming and relatively easy to implement.

Limitations

However, for the same reason as the engineering approach, the quality of estimates produced by account analysis is highly dependent on the expertise of the analysts. This method should be applied with people having an intimate knowledge of the accounts analyzed. Moreover, account analysis does not provide an in-depth understanding of cost behavior, the way the engineering approach does.

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