Definition: The account analysis method is a cost accounting method for estimating the different costs associated with producing a product. You could think of it this way. When a manager is trying to figure out how much it costs to make a product, he will divide the costs into three categories: variable, fixed, and mixed.
Variable costs are the costs that increase as more products are produced like materials. Fixed costs are the costs that remain the same no matter how many products are produced like property taxes on the manufacturing plant. Mixed costs are exactly what they sound like—a variety of fixed and variable costs that can’t be separated.
What Does Accounting Analysis Method Mean?
The purpose of the account analysis method is to estimate the costs of producing a product relating these three categories together using linear algebra. This method takes experience and knowledge of the company’s processes and production. Maybe an example will help.
Let’s assume that Apple uses a CNC machine to cut out the body of their iPads in one of their factories. This machine runs of 500 hours and incurs total indirect manufacturing costs of $5,000. Using the account analysis method, a manager could determine that out of the total costs, the fixed costs equal $2,000. Once the manager has identified the fixed costs, he can calculate the variable costs per machine hour or $3,000 / 500 hours. Now all the data can be put into the account analysis formula.
Indirect manufacturing costs = $2,000 of fixed costs + ($6 per machine hour X the total number of machine hours used in production)
Management can use this formal to plan what products will be produced and what it will cost.