Question

Tucker Industries uses the high-low method to analyze cost behavior for its manufacturing overhead costs. It has determined that direct labor hours best predict the company's overhead costs. Cost and DL hour usage for the last six months of the year are below. Month DL Hours Total Manufacturing OH Costs $485.000 July 25,000 August $540,000 26,700 September $420 000 20 000 October $416,000 21,900 November $579,000 32.000 December $455,000 20,400 What are total fixed costs? O A. $205,000 OB. $400,000 O c. $155,000 OD. $135,000

Answer 1

Your required anwer is option C i.e. $155,000

Explanation:

By using the formula of high low methos firstly we will calculate variable cost per Hour.

$Variable cost per Hour = \frac{Highest activity Total OH Cost - Lowest activity Total OH Cost}{Highest Activity DL Hours - Lowest Activity DL Hours}$

$Variable cost per Hour = \frac{\$579,000 - \$420,000}{32,000 - 20,000}$

$Variable cost per Hour = \frac{\$159,000}{12,000}$

Now by taking any activity as a base we can calculate the Fixed cost (Here I am using Highest activity):

I hope this clear your doubt.

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