Question

A firm offers accounting services to businesses at a cost. After operating for a couple of months with an initial billing rate of $25/hour. After collecting cost data for a couple of months, the firm then adjusts the rate. The activity and cost data for the first two months is included in the image below. Please answer all parts of A, B, C, and D. Note that C & D have multiple questions.
A. Classify each cost in the image as fixed, variable, or mixed.

B. For each mixed cost identified, determine the variable rate per hour and the fixed cost per month using the high-low method.

C. If the firm averages 140 hours per month, determine the billing rate per hour assuming the firm wishes to only cover costs (ignore taxes). After determining and including the billing rate per hour, how much of this rate is variable (i.e. the dollar amount per hour)? How much of this rate is fixed? Round to the nearest cent on all.

D. Determine the billing rate per hour if the firm averages 130 service hours per month. (Round to the nearest cent) Did the rate increase or decrease compared to your answer in C? Please include your explanation for why this is the case.

Month 1 Month 2 Hours of Service Performed (Activity Driver) 125 145 Costs: Salaries $3,700 $3,700 Internet & S/W Subscriptions 800 850 Consulting 1.125 1.305 Depreciation 2,400 2,400 Misc. Operating Costs 625 725 Administration 1,500 1,600 Rent 2,000 2,000 Utilities 332 365 Required: (Note that requirements C&D have multiple questions) A Classify each cost above as Fixed. Variable, or Mixed. B. For each mixed cost identified, determine the variable rate per hour and the fixed cost per month using the high-low method. C. If the office averages 140 service hours per month, determine the billing rate per hour assuming the office wishes to only cover costs (ignore taxes). How much of this rate is variable (1.e. the dollar amount per hour)? How much of this rate is Fixed (.e. the dollar amount per hour)? (Round to the nearest cent on all) D. Determine the billing rate per hour if the office averages 130 service hours per month. (Round to the nearest cent) Did the rate increase or decrease compared to your answer in C? Why?

Answer 1

A. Fixed Cost : Salaries, Depreciation and Rent

Variable : consulting , Misc Operating Cost

Mixed : Interset and s/w subscription, and Administration and utilities

B.Interest and s/w subscription

variable cost per hour = (850-800) / (145-125) = $ 2.5

Fixed cost per month = $ 800-(125*2.5) = $487.5

Administration

variable cost per hour = (1600-1500) /( 145-125) = $ 5

Fixed cost per month = $ 1500-(125*5) = $ 875

utilities

variable cost per hour = (365-332) /( 145-125) = $ 1.65

Fixed cost per month = $ 332-(125*1.65) = $ 125.75