Question

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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500 P18.1A (LO1, 2) The controller of Rather Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs. Total Total Electricity Costs Machine Hours January $2,500 300 February 3,000 350 March 3,600 April 4,500 690 May 3,200 400 June 4,900 700 July 4,100 650 August 3,800 520 September 5,100 680 October 4,200 630 November 3,300 350 December 5,860 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? 720

Answer 1

Solution 2:

Variable cost per machine hour using high low method = (Cost at high level - Cost at low level) / (High level activity - Low level activity)

= ($4,620 - $2,460) / (8000 - 3500)

= $0.48 per machine hour

Fixed costs = $4,620 - (8000*$0.48) = $780

Solution 18a:

Variable cost per machine hour using high low method = (Cost at high level - Cost at low level) / (High level activity - Low level activity)

= ($5,860 - $2,500) / (720 - 300)

= $8 per machine hour

Fixed costs = $5,860 - (720*$8) = $100

Solution 18b:

Estimated cost at 500 machine hours = $100 + 500*$8 = $4,100

Amount differ from march cost = $4,100 - $3,600 = $500