Question

chairs that are sold by various retailers across the country. The following table details the company's sales and costs for the first six months of this year. 12.APPENDIX 3A ESTIMATING VARIABILITY. Andrews Manufacturing makes folding Andrews Manufacturing Number of Manufacturing Cost Observation Units (x) January February 500 $9,500.00 750 $11,000.00 DEFINING AND USING COST EST Andrews Manufacturing Number of Units (x) Manufacturing Cost Observation March April May June 600 $9,800.00 1,000 $13,000.00 900 $12,200.00 800 $11,400.00 4,550 $66,900.00 Sum REQUIRED a. Using the high-low method, calculate the variable and fixed costs of production b. Using the scattergram method, estimate the variable and fixed costs of produc c. Using least squares regression, calculate the variable and fixed costs of produc- for Andrews Manufacturing. tion for Andrews Manufacturing. tion for Andrews Manufacturing.

Answer 1

(A) High-Low Method

High-Low method is among the several techniques used to divide a mixed cost or total cost into fixed and variable cost. It is one of the easiest method to understand.

Formula:-

Variable Cost Per Unit:-Highest Activity Cost-Lowest Activity Cost/Highest Activity Units-Lowest Activity Units

Once variable cost per unit is found, we can calculate the fixed cost by subtracting the total variable cost at a specific activity level from the total cost at that activity level.

Fixed Cost= Lowest Activity Cost - (Variable Cost Per Units x Lowest Activity Units)  =

                                                        Or

Fixed Cost= Highest Activity Cost - (Variable Cost Per Units x Highest Activity Units)  =  

$h+CazYGMZUcywAAAABJRU5ErkJggg==$

Step 1: Identify the highest and lowest activity activities

Highest activity level is 1000 units in April

Lowest activity level is 500 units in January

Step 2: Calculate variable cost per unit

Difference between highest and lowest activity units and their corresponding costs are used to calculate the variable cost per unit using the formula given above.

Variable cost per unit= $13,000-$9,500/1000-500= $7 Per Unit

Step 3: Calculate fixed cost

Fixed costs can be found be deducting the total variable cost for a given activity level from the total cost of that activity level.

Fixed Cost= $13,000-($7*1000)= $6000

(C)Least Squares Regression

Least-squares linear regression is a statistical technique that may be used to estimate the total cost at the given level of activity. The use of linear regression (least squares method) is the most accurate method in segregating total costs into fixed and variable components.

Like the other methods of cost segregation, the least squares method follows the same cost function:

y = a + bx

where:
y = total cost;
a = total fixed costs;
b = variable cost per level of activity;
x = level of activity

Variable Cost

= b= $V0nsIyf737QAAAABJRU5ErkJggg==$

Fixed Cost

Where,
n is number of pairs of units—total-cost used in the calculation;
Σy is the sum of total costs of all data pairs;
Σx is the sum of units of all data pairs;
Σxy is the sum of the products of cost and units of all data pairs; and
Σx² is the sum of squares of units of all data pairs.

$AA0gAAAABJRU5ErkJggg==$

n=6

∑x=4550

∑y=$66,900

∑x2=3,622,500

∑xy=51,980,000

Calculating the average variable cost per unit:

b =

= 7.25

Calculating the approximate total fixed cost:

a =