Question

Problem 22-01A a-c The controller of Pharoah Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs Total Total Electricity Costs Machine Hours anuary February March April May June July August September October November December $2,570 2,910 3,580 4,590 3,210 4,910 4,140 3,880 5,090 4,270 3,260 6,490 250 320 460 690 420 790 625 520 675 630 320 810 Determine the fixed- and variable-cost components using the high-low method Fixed-costs Variable-costs

Answer 1

Ans. 1	High low method:
	Variable cost per unit = (Highest cost - Lowest cost) / (Highest units - Lowest units)
		($6,490 - $2,570) / (810 - 250)
		$3,920 / 560
		$7.00	per unit
	Fixed cost =   Total cost - (Variable cost per unit * Activity level)
	Fixed cost can be calculated on the base of highest and lowest units.
	Highest units	Lowest units
	$6,490 - ($7 * 810)	$2,570 - ($7 * 250)
	$6,490 - $5,670	$2,570 - $1,750
	$820	$820
	So the fixed cost   =   $820.
Ans. 2	Electricity costs    =    Fixed electricity cost + (Variable electricity cost per unit * Expected machine hours)
		$820 + ($7 * 460)
		$820 + $3,220
		$4,040
	Amount differ   =   Estimated electricity cost - Actual electricity costs
		$4,040 - $3,580
		$460
Ans. 3	Electricity costs   =    Fixed electricity cost + (Variable electricity cost per unit * Expected machine hours)
		$820 + ($7 * 790)
		$820 + $5,530
		$6,350
	Amount differ =   Estimated electricity cost - Actual electricity costs
		$6,350 - $4,910
		$1,440