Question

Charlene is the owner of Charlene's Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C's primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work. Their approach has proven successful, but competition is getting much stiffer, and Charlene is concerned that her approach to determining costs and prices for any particular job is not correctly incorporating all of the company's costs. She has heard about the concept of cost allocation and asks her accountant to create an allocation system for the business. Her accountant decides to implement a single-driver allocation system and needs to develop a reliable cost function to estimate total indirect costs. She will use this estimate for the numerator of the single driver "overhead" rate, and she will use service hours as the cost driver and denominator in the "overhead" rate. To estimate the parameters of this cost function, the accountant first studied the behavior of last month's costs, when the company spent 293 service hours repairing 30 computer systems. Here are the results of her analysis: Cost Item Variable Cost Utilities Office rent Fixed Cost $210 $3,709 $3,076 $132 $0 Administration $216 Supplies $0 $3,322 Training $330 $336 $7,331 Total $4,000 Concerned that last month may not have been a typical month and her breakdown of fixed and variable costs not completely correct, the accountant decided to use the high-low method to create another cost function. She gathered individual cost and service hour data from the last six months; the following were for the two months when costs and service hours were the lowest and the highest: Cost Item high month Utilities $322 | low month $212 $2,985 $3,146 Office rent Administration $2,985 $3,509 $3,520 $1,488 Supplies Training Total $591 $8,422 246 30 $749 $11,085 562 71 Service hours Customers Next month, Charlene expects the company to spend 450 hours solving clients' computer system problems. REQUIRED (ROUND ALL PER-UNIT COSTS TO TWO DECIMAL PLACES AND TOTAL COSTS TO THE NEAREST DOLLAR.] Part A (6 tries; 5 points) What is the accountant's estimate of total "overhead" next month if she uses the cost function based on her analysis of last month's cost data? Submit Answer Tries 0/6 Part B (6 tries; 5 points) What is the accountant's estimate of total "overhead" next month if she uses the cost function based on the high-low method? Submit Answer Tries 0/6

Answer 1

Answer 1

$ 13,474

Calculations:

Total cost = Fixed cost +variable cost

= $ 7331+ ( $ 4000/ 293* 450)

= $ 13,474

Answer 2

$ 10,141

Calculations:

	Lowest range	Highest range
Cost	$          8,422	$         11,085
Hours	246	562

As per High Low Method,

Variable cost per hour = Change in costs / change in hours

Variable cost per hour = ($11,085-$8,422)/(562-246)

Variable cost per hour = $2,663/316

Variable cost per hour = $8.43

Fixed Cost = Total Cost - Variable Cost

Fixed Cost = Total Cost - (Variable Cost per hour * hours)

Fixed Cost = $ 11,085-($8.43*562)

Fixed Cost = $6347

Total cost = Fixed cost +variable cost

= $ 6347+ ( $ 8.43 * 450)

= $ 10,141

In case of any doubt, please comment.