Question

Tafic-2 E3.26 Estimating cost behaviour; high-low method: manufacturer Daisy Wong is the accountant for the Heavy Manufacturing Company. She has been asked by one of Heavy Manufacturing's senior managers to provide an estimate of the firm's utilities costs using the high-low method. Daisy has identified machine hours as the most suitable cost driver. The following costs were incurred during the previous 12 LO 3.9 months: Ump autions Month Machine hours Utilities cost January 52 500 $35 100 February 31 500 33 150 March 33 000 33 000 April 36 000 33 675 May 45 000 34 350 June 48 000 35 025 July 60 000 42 000 August 45 000 34 200 September 45 000 34 500 October 42 000 34 050 November 61 500 36 150 December 58 500 37 425 Required: 1. Use the high-low method to estimate the company's utilities cost behaviour and express it in equation form. 2. Predict the utilities cost for a month in which 39 000 machine hours are used 2

Answer 1

Since the cost is not same for all volumes, therefore it cannot be fixed cost
and cost does not directly varies with volume, therefore it is not variable cost.
It is a mixed cost.

Variable cost per unit = (Highest Cost - Lowest Cost) / (Corresponding Volume - Corresponding Volume)
= ($42000 - $33000) / (60000 - 33000) = $1/3 per unit

Fixed Cost = $42000 - 60000 x $1/3 = $22000
Equation = $22000 + $1/3 x volume

Utilities cost for 39000 units = $22000 + 39000 x $1/3 = $35000