The controller of Rather Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs. Total Electricity Costs.
Instructions
a. Determine the fixed- and variable-cost components using the high-low method.
b. What electricity cost does the cost equation estimate for a level of activity of 500 machine hours? By what amount does this differ from March's observed cost for 500 machine hours?
c. What electricity cost does the cost equation estimate for a level of activity of 700 machine hours? By what amount does this differ from June's observed cost for 700 machine hours?
a.
Variable cost per unit = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)
= (5,860-2,500)/ ( 720-300)
= 3,360/420
= 8 per machine hour
Fixed cost = Highest activity cost - Highest activity x Variable cost per hour
= 5,860 - (720 x 8)
= 5,860-5,760
= $100
b.
Total cost = Fixed cost + Variable cost per hour x machine hours
= 100+8 x MH
Total cost of 500 machine hours = 100+8 x 500
= 100+4,000
= $4,100
Machine observed cost = $3,600
Difference in estimated cost and actual cost = 4,100-3,600
= $500
c.Total cost = Fixed cost + Variable cost per hour x machine hours
= 100+8 x 700
Total cost of 700 machine hours = 100+ 8 x 700
= 100+5,600
= $5,700
Machine observed cost = $4,900
Difference in estimated cost and actual cost = 5,700-4,900
= $800
Kindly comment if you need further assistance. Thanks
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2. The controller of Hall Industries has collected the following
monthly expense data for use in analyzing the cost behavior of
maintenance costs.
total
total
Month
Maintenance Costs
Machine Hours
1
2460
3500
2
3000
4000
3
3600
6000
4
4500
7900
5
3200
5000
6
4620
8000
(a) Determine the fixed- and variable-cost components using the
high-low method.
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