Question

Johnson Corporation is preparing a flexible budget and desires to separate its electricity expense which is semi-variable and fluctuates with total machine hours, into its fixed and variable components. Information for the first three months of 2013 is as follows:

Machine hours Electricity Expense

January 3, 500 P31, 500

February 2, 000 P20, 000

March 4, 000 P35, 600

Answer 1

Fixed Cost P 4,400

Variable cost per unit P 7.80

Working:

As per High-Low method,
Variable expense per unit	=	(Cost at highest level - Cost at lowest level)/(Higher unit of activity - Lower unit of Activity)
	=	(35600-20000)/(4000-2000)
	=	P 7.80
Now Fixed Cost is calculated as follows:
level of activity (a)				2,000	4,000
Total cost (b)				20,000	35,600
Variable expense (c=a*$ 7.80)				15,600	31,200
Fixed Cost (d=b-c)				4,400	4,400
Thus,
Fixed Cost		=	P 4,400
Variable cost per unit		=	P 7.80